Estate and Inheritance Taxes
Estate and inheritance taxes are taxes on the transfer of property at death.
- How much revenue do state and local governments raise from estate taxes?
- How do estate taxes differ across states?
- How did changes in federal law affect state estate taxes?
- Further reading
State and local governments collected a combined $5 billion in revenue from estate, inheritance, and gift taxes in 2016, or well less than 1 percent of general revenue. New York collected $1.4 billion of estate tax revenue in 2016, the most in any state. Pennsylvania and New Jersey were the only other states to collect more than $500 million. In total, 10 states collected more than $100 million. The taxes accounted for nearly 1 percent of state and local general revenue in New Jersey, Pennsylvania, and Rhode Island in 2016, and were 0.5 percent of geneal revenue in New York.
Ohio repealed its estate tax in 2013 but still collected $45 million from taxes levied before repeal. Many other states that repealed their estate tax also collected small amounts of estate tax revenue for the same reason.
In 2019, 12 states and the District of Columbia levied an estate tax, and six levied an inheritance tax. Maryland levied both. An inheritance tax is levied on heirs rather than the estate of the deceased.
Like the federal estate tax, all states that tax estates offer an exemption that excludes most estates from taxation. The lowest state exemptions in 2019 are $1 million in Oregon and Massachusetts. The highest exemptions are in New York ($5.74 million), Maine ($5.7 million), and the District of Columbia ($5.6 million). All three of those jurisdictions, plus Hawaii and Maryland, previously conformed with the federal estate tax threshold, but decoupled from the federal law after the Tax Cuts and Jobs Act increased the federal threshold to $11.2 million.
Most states have a progressive rate structure (for example, see New York's tax table) with a top estate tax rate of 16 percent, a relic of the previous federal estate tax credit system (see the next section). However, Connecticut (12 percent), Hawaii (15.7 percent), Maine (12 percent), and Washington (20 percent) have set their own rates. Hawaii will increase its top rate to 20 percent in 2020.
State estate taxes: Top tax rates and exemption thresholds, 2019
- Connecticut: 12%, $3,600,000
- District of Columbia: 16%, $5,600,000
- Hawaii: 15.7%, $5,490,000
- Illinois: 16%, $4,000,000
- Maine: 12%, $5,700,000
- Maryland: 16%, $5,000,000
- Massachusetts: 16%, $1,000,000
- Minnesota: 16%, $2,700,000
- New York: 16%, $5,740,000
- Oregon: 16%, $1,000,000
- Rhode Island: 16%, $1,564,719
- Vermont: 16%, $2,750,000
- Washington: 20%, $2,193,000
States with inheritance taxes (Iowa, Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania) have also various exemptions and tax rates. For example, in New Jersey, surviving spouses, parents, children, and grandchildren are all exempt from the tax. However, a brother, sister, niece, or nephew can pay a tax rate up to 16 percent on the inheritance. Meanwhile, in Pennsylvania, a surviving spouse is exempt, a direct decedent pays a 4.5 percent tax, a sibling pays a 12 percent tax, and other heirs pay a 15 percent tax.
Before 2001, all 50 states and the District of Columbia had an estate tax because the federal estate tax provided a dollar-for-dollar credit of up to 16 percent of the estate’s value for state estate taxes. Thus, states could raise revenue without increasing the net tax burden on their citizens by linking directly to the federal credit, and all states did so by setting their estate tax rate equal to the maximum federal credit.
However, federal tax changes in 2001 (the Economic Growth and Tax Relief Reconciliation Act), phased out the federal credit in 2005, replacing it with a less valuable deduction. Because state estate taxes were linked to the federal credit, this meant all state estate taxes would disappear if states did not act. In response to the federal change some states decoupled from the credit and created their own state estate tax, some states repealed the tax outright, and others did nothing (effectively ending the tax).
Back from the Dead: State Estate Taxes After the Fiscal Cliff
Norton Francis (2012)