retirement

State Death Taxes Continue to Die Out

Only 17 states, plus Washington, D.C., still have estate taxes or inheritance taxes (or both) on the books.

Dying is getting cheaper. While the latest federal tax overhaul doubles the estate-tax exemption, the trend of states loosening their own grip on estates continues in 2018.

Delaware is one of the latest states to bury its estate tax, which snared estates exceeding $5.49 million last year but has completely disappeared. New Jersey, too, has ditched its estate tax altogether, after hiking its exemption to $2 million in 2017 from its notoriously low, longtime exemption of $675,000.

That leaves 12 states (plus the District of Columbia) with state estate taxes on the books. And many of them are hiking exemptions for 2018, sparing more families from a tax bill when a loved one passes. Connecticut, for instance, raises its exemption by $600,000 for 2018, to $2.6 million, and Maryland is lifting its exemption to $4 million, up $1 million from last year. Generally, state estate tax rates are on a graduated scale, typically topping out at 16%.

Estate taxes reduce what's left for heirs, of course, but in some states, those heirs get hit directly. While New Jersey eliminated its estate tax, the Garden State still taxes the transfer of assets to certain heirs, such as siblings. Five additional states still levy inheritance taxes: Iowa, Kentucky, Maryland, Nebraska and Pennsylvania.

Despite its nickname, the Free State, Maryland is now the lone state in the union to impose both estate and inheritance taxes. Washington, D.C., also impose both estate and inheritance taxes.

States with Estate Taxes or Inheritances Taxes (or Both)

  • Connecticut; estate tax only
  • Hawaii; estate tax only
  • Illinois; estate tax only
  • Iowa; inheritance tax only
  • Kentucky; inheritance tax only
  • Maine; estate tax only
  • Maryland; both
  • Massachusetts; estate tax only
  • Minnesota; estate tax only
  • Nebraska; inheritance tax only
  • New Jersey; inheritance tax only
  • New York; estate tax only
  • Oregon; estate tax only
  • Pennsylvania; inheritance tax only
  • Rhode Island; estate tax only
  • Vermont; estate tax only
  • Washington state; estate tax only
  • Washington, D.C.; both

If you live in one of the 17 states that levies a death tax, pay close attention to the rules of how the tax works. In New York, for example, taxable gifts made within three years of death can be added back to an estate when calculating the estate tax, and if the value of the estate is more than 105% of the current exemption (now $5.25 million), the exemption is extinguished and the entire estate is taxed.

With inheritance taxes, the relationship to the decedent can determine whether and how an heir is taxed. Inheritance tax may skip close relatives, such as children and grandchildren, which is the case in Iowa and Kentucky, for example. But Pennsylvania taxes lineal heirs at 4.5% on the transfer of assets from the decedent to the beneficiary, while that rate climbs to 12% if the assets are transferred to a sibling of the deceased. Read more about each state's tax rules at Kiplinger's State-by-State Guide to Taxes on Retirees.

Will States Follow the New Federal Estate-Tax Exemption?

A big question mark now is how states will handle the very generous new federal estate-tax exemption. Several states tie their exemption to the federal government's, while other states in the past few years have been gradually raising their exemption to eventually match the federal exemption. But the states that decided to follow Uncle Sam's lead in recent years, such as Maine, Maryland and New York, did so when the exemption was around a mere $5 million per person.

Will states follow the more generous $11.2 million per person federal exemption effective in 2018? The answer to that multimillion-dollar question is hazy.

Bruno Graziano, senior estate tax analyst for Wolters Kluwer Tax & Accounting, says he expects that state legislatures in affected states will gauge how costly it will be to state revenues to match Uncle Sam's generosity. "As time goes on, we'll see what the state reaction is," he says. Stay tuned.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit
Tax Breaks

The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit

If you didn't get a stimulus check, or you didn't get the full amount, you may be able to claim the recovery rebate credit on your 2020 tax return.
January 18, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President-elect Joe Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 18, 2021

Recommended

President Biden's Tax Plans for the Next Few Years
Politics

President Biden's Tax Plans for the Next Few Years

With control of both the House and Senate in Democratic hands, President Biden will be able to get more of his tax agenda through Congress. Here's wha…
January 20, 2021
How to Handle an IRS Audit of Your Tax Return
tax returns

How to Handle an IRS Audit of Your Tax Return

Don't panic! Keys to success include being well prepared, establishing credibility right from the start, and keeping your wits about you.
January 15, 2021
12 IRS Audit Red Flags for Retirees
retirement

12 IRS Audit Red Flags for Retirees

Seniors Beware: Your actions can increase the chances of the IRS giving your tax return a closer look.
January 14, 2021
22 IRS Audit Red Flags
tax returns

22 IRS Audit Red Flags

There's no sure way to avoid an IRS audit of your tax return, but these red flags could increase your chances of drawing unwanted attention from the I…
January 12, 2021