In addition to the federal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. (which is fourth highest in the OECD), many U.S. states levy their own estate and inheritance taxes. While estate taxes are charged against the estate regardless of who inherits the assets, inheritance taxes are levied on the transfer of assets to heirs, based on the relationship of the inheritor to the deceased. In the case of inheritance taxes, spouses, children, or siblings often have different exemptions, which we list in detail in table 35 in the 2015 edition of our annual handbook, Facts & Figures.
Currently, fifteen states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both.
The state with the highest maximum estate tax rate is Washington (20 percent), followed by eleven states which have a maximum rate of 16 percent. Hawaii and Delaware have the highest exemption threshold at $5,430,000 (matching the federal exemption). New Jersey has the lowest, only exempting estates up to $675,000.
Of the six states with inheritance taxes, Nebraska has the highest top rate at 18 percent. Kentucky and New Jersey are close behind with top rates of 16 percent.
Reform and repeal of estate and inheritance taxes have been very frequent in the last few years, sometimes in states you might not expect. In 2013, Indiana sped up the repeal of its inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. , retroactively to January 1, 2013. Tennessee's estate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. will phase out fully in 2016. Maryland and New York are in the process of phasing in new, higher estate tax exemptions, eventually matching the federal exemption level ($5.9 million) by 2019. Minnesota is in the process of doubling its exemption from $1 million to $2 million over five years. The District of Columbia is slated to phase in higher exemptions to the estate tax as new revenues become available.
Estate and inheritance taxes have large compliance costs, have been shown to suppress entrepreneurship, and are among the most harmful taxes to economic growth.
Click here for more information on estate and inheritance taxes.
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