The federal estate tax generally applies when a person’s assets exceed a certain amount — $11.2 million in 2018 — at the time of death. When Uncle Sam collects the estate tax, the U.S. Treasury can get almost 40% of any dollars above the current exclusion figure, which is typically adjusted each year for inflation and doubled for married couples.
But a handful of states also impose estate taxes at various income thresholds.
Which states have estate tax?
- For 2018, 12 states and the District of Columbia have an estate tax. Many have lower estate tax thresholds than the federal government. Each state’s exclusion amount and rounded top tax rate on the excess are shown in the table below.
|State||Exclusion amount||Top tax rate|
|District of Columbia||$11.2 million||16%|
|New York||$5.25 million||16%|
|Rhode Island||$1.538 million||16%|
- New Jersey’s estate tax was repealed on Jan. 1, 2018.
- If you live in one of the states with an estate tax, the good news is that your estate tax payments are subtracted from the value of your taxable estate before you calculate what you might owe the U.S. Treasury.
Which states have inheritance tax?
A few states impose inheritance taxes, which are different from estate taxes in that they are paid by heirs rather than by the deceased’s estate.
- Six states have an inheritance tax. Maryland collects both estate and inheritance taxes.
- Inheritance tax rates often depend on the heir’s relationship to the deceased. A surviving spouse is exempt from inheritance tax in all states. Some states tax a deceased person’s children, but at a low rate. More distant relatives or heirs who aren’t related to the deceased usually face the highest inheritance tax rates.
Here are the six states that collect an inheritance tax on beneficiaries and their potential maximum tax rates:
|State||Top tax rate|
- Although New Jersey’s estate tax ceased on Jan. 1, 2018, the Garden State’s inheritance tax remained.
How to reduce estate taxes
Remember, inheritance tax isn’t the same thing as estate tax. If you want to reduce your estate taxes at the state level before you die, you can generally use the same tactics you would use to protect your property from the federal estate tax. They include:
- Spending your assets. If you’re not afraid of running out of money before you die, enjoy your wealth.
- Spreading your assets. Depending on your state’s tax laws, you could give away part of your estate as gifts to loved ones while you’re still around. Most states don’t tax gifts.
- Shielding your assets in a trust. Properly created irrevocable or bypass trusts could provide a way to legally shelter some of your assets from state and federal taxes.
- Moving to a more favorable tax environment. Since most states don’t have estate or inheritance taxes, you have many relocation options.
- For more on transferring your assets wisely, see the NerdWallet estate planning checklist.
Watch out for capital gains on your inheritance
- Even if your inheritance isn’t taxed when you receive it, any subsequent earnings or income that it produces is taxable income at both the federal and state levels.
- If you decide to sell an asset you have inherited, any profit could be taxed at the federal level as a capital gain, either long- or short-term, depending on when you dispose of the property.
- If you do receive a bequest, especially a sizable one, it’s a good idea to talk with an attorney who specializes in estate tax matters about the best ways to minimize any potential state tax bite.