Estate and Inheritance Tax Terms To Know
Understanding what individual states do and don’t do begins with grasping the various terms involved with estate and inheritance taxes, and what they mean for you. The term “death tax” is something of an umbrella term that covers both estate and inheritance taxes. Estate taxes are levied against an estate based on its value, but only values above a certain threshold called an “exemption” are taxed on that portion. The estate tax is paid by the estate, whereas an inheritance tax is levied on, and paid by, the beneficiary who receives a specific bequest. It’s based on the value of that transfer, not the whole estate. Most states that have an inheritance tax will exempt very close relatives, and sometimes the deceased will indicate in their will that they want the estate to cover this tax. “Portability” is another common term in estate planning. It means that any exemptions not used by one spouse’s estate can be transferred to the surviving spouse for later use at their time of death.
States Without Death Taxes
There are 33 states that do not collect an estate tax or an inheritance tax:
States That Do Collect Estate or Inheritance Taxes
Many states collect just one type of tax—an estate tax or an inheritance tax. Maryland is the only state that levies both.
States That Have Repealed Estate Taxes
Seven states have repealed their estate taxes since 2010. Kansas and Oklahoma abolished estate taxes by legislative action on Jan. 1, 2010. North Carolina also repealed its estate tax on Jan. 1, 2010, but it reinstated it a year later. It later turned around and repealed the tax again, retroactively to Jan. 1, 2013. The Ohio estate tax was repealed as of Jan. 1, 2013, under Ohio budget laws. Tennessee phased out its estate tax in 2016. Delaware repealed its death tax as of Jan. 1, 2018. New Jersey phased out its estate tax in 2018.
Other Death Tax Changes by State
Hawaii
Hawaii enacted an estate tax effective May 1, 2010. Then, in May 2012, the state adjusted its laws to provide that the Hawaii estate tax exemption would be tied to the federal estate tax exemption for decedents dying after Jan. 25, 2012.
Illinois
Estate taxes were repealed in Illinois on Jan. 1, 2010, although they were later reinstated effective Jan. 1, 2011. The estate tax exemption increased two more times, settling on $4 million effective Jan. 1, 2013.
Indiana
Indiana passed laws in 2012 that would have phased out its inheritance tax by 2022. The inheritance tax exemption was increased from $100,000 to $250,000 for certain family members effective Jan. 1, 2012. Nonetheless, Indiana’s inheritance tax was repealed retroactively to Jan. 1, 2013, in May 2013.
Maine
Maine’s estate tax exemption was increased to $6.01 million for tax year 2022.
Maryland
The Maryland Estate Tax/Unified Credit was signed into law on May 15, 2014. The law repealed and re-enacted Maryland’s estate tax so the exemption would increase. It was changed to $5 million in 2019.
Minnesota
In July 2013, Minnesota adjusted its estate tax laws as they applied to non-residents who own real estate there. This legislation included Minnesota property held in pass-through entities such as S corporations, partnerships, LLCs, or a nonresident’s estate. Then, under legislation signed in March 2014, the state estate tax exemption was retroactively increased to $1.2 million for all 2014 deaths. The estate tax rate was adjusted so that the first dollars are taxed at a 9% rate, which ultimately maxes out at 16%. The estate tax exemption was then increased in $200,000 increments to reach $3 million in 2020. Finally, the law taxing a nonresident decedent’s interest in a pass-through entity was modified to exclude certain publicly traded entities. However, it still applies to those taxed as partnerships or S corporations that own a closely held business, farm, or cabin.
New York
New York made significant changes to its estate tax laws in April 2014 by increasing the state exemption from $1 million to $2.06 million for deaths occurring on or after April 1, 2014, and before April 15, 2015. The exemption continued to increase annually until it matched the federal estate tax exemption in 2019. It is adjusted for inflation on an annual basis now and is $6.11 million for tax year 2022.
Oregon
Oregon’s estate tax rates changed on Jan. 1, 2012, so that estates valued between $1 million and $2 million would pay slightly less in estate taxes, and estates valued over $2 million would pay more. Then a November 2012 ballot measure completely repealed the state’s estate tax by a majority vote.
Rhode Island
Rhode Island has an estate tax exemption of $1.64 million for tax year 2022. The exemption is adjusted annually for inflation.
Vermont
Vermont’s estate tax exemption is $5 million.
Washington
Washington made several changes to its state estate tax laws in June 2013. The $2 million estate tax exemption was indexed for inflation beginning in 2014. An estate tax deduction of up to $2.5 million was available for certain family-owned business interests if the values didn’t exceed $6 million. In 2018, Washington made its estate tax exemption worth $2.19 million.
