Only the very rich need to worry about the federal estate tax, which currently applies to extremely large estates (worth $12.06 million or more, or $24.12 million for couples). However, some estates that don't owe federal estate tax do owe a separate state estate tax. If you live in one of the states that imposes its own estate tax (see below), or if you own real estate or tangible property (like a boat or plane) that is physically located in one of these states, you might want to find out whether your estate is likely to owe a state tax when you die.
Estate taxes are taxes owed when you die, and they apply only if your estate (the property you leave behind at death) is greater than a certain value. The tax is paid from your estate before your remaining assets are distributed to your inheritors. While most people will never have to worry about federal estate tax, the threshold that triggers state estate tax is lower.
Each state has its own state-specific exemption amount. The state will not impose an estate tax unless the estate exceeds this particular amount. Three states have set this exemption as low as $1 million.
Example: If you live in Massachusetts (whose estate tax exemption is one of the lowest, at $1 million), and your estate is worth $1.5 million, your estate will owe Massachusetts estate tax but not federal estate tax.
Example: If you live in Massachusetts and your estate is worth $13 million, you will owe both Massachusetts estate tax and federal estate tax.
If you do think you might owe a state estate tax, you'll be relieved to hear that although the tax rates vary by state, they are all far lower than the hefty federal estate tax rate of 40%. For the particular details of your state, explore the links below.
The following states collect their own estate tax:
These state-specific articles will walk you through your state's exemption amounts, tax rates, and filing deadlines. For the nitty-gritty, you can also consult the website of your state's taxing authority. Be forewarned that estate taxes are very complicated, and if you're navigating state statutes and rate tables, you'll often benefit from the help of a tax professional or estate lawyer.
The state estate tax has also fallen out of favor in several states. The following states voted in relatively recent years to repeal the tax, so the tax no longer applies to deaths occurring after the date noted. For deaths that occurred prior, the tax would still apply.
The particulars vary by state, but generally, if the "gross estate"—the total value of everything you left behind at your death (before subtracting available deductions)—is greater than your state's exemption amount, your estate's personal representative or executor must file a state estate tax return. The gross estate includes all of the obvious assets, like your 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.
Even if you must file a state estate tax return, you might not actually owe anything in taxes. Deductions can reduce the value of the taxable estate so that it drops below the exemption amount. If that happens, the estate won't owe any tax, though it still must file the estate tax return. These deductions might include:
Example: If you live in Massachusetts, which has an estate tax exemption of $1 million, and you leave behind a gross estate of $2 million, the executor of your estate will have to file an estate tax return. But if $1.5 million of that property was left to your surviving spouse, then your taxable estate would be only $500,000. In that case, your executor would have to file an estate tax return, but your estate 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. Often, states will grant an extension to file the return (some states do this automatically, so that you do not need to request it), but this extension usually applies only to the filing of the return, and not to the payment of the tax; the estimated tax must still be paid by the original deadline.
There are two types of state "death taxes." A few states impose an inheritance tax rather than an estate tax. (Maryland has the distinction of being the sole remaining state in the U.S. that has both an inheritance tax and an estate tax—but Maryland's inheritance tax has generous exemptions.) Inheritance tax differs from estate tax in that inheritance tax looks at each inheritor of your property (rather than the total property you leave behind at your death). Each inheritor will pay a different tax rate on the property inherited, and the rate will depend on their relationship to you. For example, your surviving spouse is exempt from inheritance tax, and close family members typically pay no tax or a low tax rate. People who are more distantly related, or who aren't related at all, pay a higher rate.
Learn more about state inheritance tax.