North Carolina Estate Tax: Repealed for 2013 and Beyond

A retroactive repeal means no estate tax for deaths as of January 1, 2013.

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The North Carolina legislature repealed the state's estate tax in July 2013. The legislation made the repeal effective retroactively, for deaths on January 1, 2013 or later.

The estate of a North Carolina resident who died before 2013 and was fortunate enough to leave a very large estate, worth millions, may owe both federal estate tax and a separate North Carolina estate tax. The state exemption amount was tied to the federal one, which means that for deaths in 2012, estates with a total value of up to $5.12 million were exempt from both state and federal estate taxes. 

The estates of nonresidents who died in 2012 may also owe North Carolina estate tax, if the deceased person owned more than $5.12 million of North Carolina property—that is, real estate other tangible assets located in the state.

Property Left to the Surviving Spouse

Property left to the surviving spouse is exempt from both state and federal estate tax, no matter what the amount. This is called the marital deduction. (There’s one exception to the rule, for federal estate tax; noncitizen spouses cannot take advantage of the unlimited marital deduction.)

The Gross Estate

The executor will need to add up the date-of-death value of the deceased person's assets to determine whether or not federal and state estate tax returns are required. Pretty much everything the deceased person owned—real estate, cars, bank accounts, securities, retirement plan funds, and so on—is  counted, whether or not it goes through probate or was held in a living trust. If the person made large taxable gifts (more than the annual federal gift tax exclusion amount, which is currently $14,000 per year per recipient), the taxable amount of those gifts is also counted as part of the estate.

If the deceased person owned assets with someone else, only the value of the deceased person's interest is included in the gross estate. For example, if the deceased person and his or her spouse owned a home together, half of its value will be included in the estate.

Estate Tax Returns and Rates

If the estate is large enough, the executor must file a North Carolina estate tax return and pay any tax due nine months after the death. That’s the same time that the federal estate tax return is due. It’s common, though, to ask the IRS for an extension to file the federal return, and if the executor does so, it automatically extends the deadline for the state return as well.

The top North Carolina estate tax rate is 16%, far below the current federal rate. Any tax due can be paid in installments.

You can download North Carolina estate tax return and instructions from the North Carolina Department of Revenue website.

Federal and state estate tax returns are quite complicated. An executor who must file them will need to hire a lawyer or CPA who has lots of experience with these matters. The lawyer's fee can be paid from the assets of the estate.

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