Navigating Estate and Inheritance Taxes: What You Need to Know by State
Estate Taxes and Inheritance Taxes by State
When it comes to estate planning, understanding the tax implications of passing on your wealth is crucial. Estate taxes and inheritance taxes are often confused with each other, but they are different in terms of who pays them and when they are paid. While not all states have an estate or inheritance tax, those that do can significantly impact what you leave behind for your loved ones.
Estate Tax
An estate tax is a tax levied on the total value of someone’s assets at death. The federal government imposes an estate tax on estates worth more than $11.7 million per individual or $23.4 million per couple as of 2021.
However, some states impose their own estate taxes with much lower thresholds. As of 2021, there are twelve states plus the District of Columbia that levy their own estate taxes: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York state (not including NYC), Oregon Rhode Island Vermont and Washington.
The threshold amounts vary from as low as $1 million in Massachusetts to $5.93 million in Oregon; however several state thresholds will be increasing over the next few years due to recent legislation changes.
Inheritance Tax
While an estate tax is paid by the decedent’s estate before distribution to heirs or beneficiaries inheritances taxes are separate since they’re assessed against what heirs receive based on their relationship with the deceased person.
As of 2021 six U.S. states collect inheritance taxes: Iowa,Kentucky,Maryland ,Nebraska ,New Jersey ,Pennsylvania .
These six states follow varying rules about which heirs must pay inheritance taxes and at what rates depending upon how closely related they were to the deceased person . Typically children and spouses pay less than siblings or distant relatives
Planning Ahead
It’s important for individuals considering their long-term financial plans consult a professional regarding these matters since there may be other considerations to take into account that aren’t apparent at first glance.
The bottom line is understanding the tax implications of your wealth and state you live in will help you plan for the future and ensure that your assets are distributed according to your wishes.