So you think you will avoid federal estate taxes? That may be so, but 21 states and the District of Columbia are also looking to tax your estate, your inheritance, or both. Where you live could make a big difference.
Recently passed federal legislation increased the exemption amount before your estate pays taxes on your assets when you die. The amount for 2013 is $5.25 million. This makes most of our estates tax-free when we die. Or does it?
Where you live could cost you a bundle in inheritance and estate taxies since 21 states have some form of estate taxes, inheritance taxes, or both. To make matters worse, this state tax landscape is constantly changing making it tough to stay current. Here is useful information on which states want a cut of your money when someone passes away.
8 states currently tax your inheritance. The following states charge inheritance tax: Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee, and Maryland. The tax rate can be as high as 20% and start with inheritance as low as $1 if you are unlucky to inherit money and live in Pennsylvania or Iowa.
Some states have estate taxes starting at lower amounts than the federal $5.25 million. Noted here are these states’ estate tax exemption amount and their maximum estate tax rate (in parentheses).
Some states match the federal exemption amount. These states match the current federal estate tax exemption, but charge their own estate tax as well.
Two states charge both. New Jersey and Maryland currently charge both an estate tax and an inheritance tax.
What can you do?
- Understand inheritance consequences. If you have a relatives mentioned in your will that live in Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee or Maryland, you may wish to conduct some planning activities.
- Move before it is too late. 29 states have no estate taxes (or inheritance tax). Many of them (Florida, Texas, Alaska, South Dakota, Nevada, and Wyoming) also have no state income taxes. But prior to packing your bags, review other tax implications within your target “move to” state.
- Set up a trust. If you live in one of the states with estate taxes, consider setting up appropriate trusts to help protect your assets from the state tax man.
- Gifts? Remember you can also use gifts as a means of transferring some of your assets tax-free. Just make sure you understand the limits on tax-free gift giving.
- Want more information? Visit each state’s respective web site and review their estate and inheritance laws.