Most Americans don’t need to worry about the federal estate tax, which applies only to very large estates: under current law, only estates of more than $5.25 million for an individual and twice that for a married couple. But many estates that don’t owe federal tax do owe a separate state estate tax. It depends on where the deceased person lived and owned property.
States That Impose Their Own Estate Tax
These states collect their own tax on residents’ estates:
- District of Columbia
- New Jersey
- New York
- North Carolina
- Ohio (repealed for deaths as of January 1, 2013)
- Rhode Island
- Wisconsin (repealed for deaths in 2008 through 2012)
Each state taxes estates that exceed a certain value. Many states exempt estates up to $1 million, but New Jersey, for example, taxes estates of $675,000 or more. Some states have linked their systems to the federal estate tax system, and exempt all estates that the federal government also exempts. In those states (North Carolina, for example), the exempt amount for deaths in 2013 is $5.25 million.
Many state tax exemption amounts have changed in the last few years. To get the most up-to-date numbers, check online, at the website of your state’s taxing authority.
How Estate Tax Works
Estate tax is assessed on the total value of everything the deceased person owned at death. This includes all the obvious assets, like real estate and bank accounts, plus some that aren’t so obvious—for example, the proceeds of a life insurance policy that the deceased person owned.
If the value of the gross estate (that’s everything, not counting deductions that the estate may be allowed to take on the estate tax return) is greater than the state’s exemption amount, the executor must file a state estate tax return. The value of the assets is determined as of the date of death, unless the state allows the executor to choose an alternate valuation date. When the estate tax return is prepared (this is a job for experts), deductions from the gross estate may reduce the value of the taxable estate so much that it’s below the estate tax exempt amount. If that happens, the estate won’t owe any tax, though it must still file the estate tax return.
For example, if someone who lives in Massachusetts, which exempts estates of $1 million, leaves a gross estate of $2 million, an estate tax return will have to be filed. But if most or all of the property was left to the surviving spouse (or to a tax-exempt charity), then no tax will be owed, because those amounts aren’t taxed. The estate would have to file an estate tax return, but wouldn’t owe any tax.
Most states require estate tax returns to be filed within nine months after the death, which is the same time that federal estate tax returns are due to the IRS. Some states grant (automatically or if the executor requests it) an extension to file, but the estimated tax must be paid by the original deadline. Interest accrues on any unpaid tax.
How Estate Tax Differs From Inheritance Tax
A few states impose an inheritance tax on the people who inherit property. The federal government does not impose an inheritance tax. Inheritance tax doesn’t depend on the total amount of the estate. Instead, it depends on who inherits the property. The surviving spouse is exempt from inheritance tax in all states. Some states tax the deceased person’s children, but at a low rate. People who are more distantly related, or who aren’t related at all, are taxed at a higher rate.
Learn more about state inheritance tax.