Estate and Inheritance Taxes
Estate and inheritance taxes are taxes levied on the transfer of property at death. An estate tax is levied on the estate of the deceased while an inheritance tax is levied on the heirs of the deceased. Only 17 states and the District of Columbia levy an estate or inheritance tax.
- How much revenue do state and local governments raise from estate taxes?
- How do estate taxes differ across states?
- How did a 2001 federal law change upend state estate taxes
- Further reading
State and local governments collected a combined $4.9 billion in revenue from estate and inheritance taxes in 2017, or less than 1 percent of general revenue. New York collected $1.2 billion in estate tax revenue in 2017, the most of any state, but that was still less than 1 percent of its state and local general revenue. Pennsylvania and New Jersey were the only other states to collect more than $500 million in estate or inheritance tax revenue in 2017.
Many states that have repealed their estate tax still collected a small amount of estate tax revenue in 2017. For example, Ohio repealed its tax in 2013 but collected $45 million in estate tax revenue in 2017 from taxes levied before repeal.
In 2020, 12 states and the District of Columbia levy an estate tax and six levy an inheritance tax. Maryland levies both.
Like the federal estate tax, all states that tax estates offer an exemption that excludes most estates from taxation. The lowest state exemptions in 2020 are $1 million in Oregon and Massachusetts. The highest exemptions are in New York ($5.85 million), Maine ($5.8 million), and the District of Columbia ($5.7 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 2017 Tax Cuts and Jobs Act increased the federal threshold from $5.5 million to $11.2 million (with annual increases tied to inflation).
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 for more on the old federal credit and how it affected state estate taxes). However, Connecticut (12 percent), Hawaii (20 percent), Maine (12 percent), and Washington (20 percent) have set their own top estate tax rates.
State estate taxes: Top tax rates and exemption thresholds, 2020
- Connecticut: 12%, $5,100,000
- District of Columbia: 16%, $5,681,760
- Hawaii: 20%, $5,490,000
- Illinois: 16%, $4,000,000
- Maine: 12%, $5,800,000
- Maryland: 16%, $5,000,000
- Massachusetts: 16%, $1,000,000
- Minnesota: 16%, $3,000,000
- New York: 16%, $5,850,000
- Oregon: 16%, $1,000,000
- Rhode Island: 16%, $1,579,922
- Vermont: 16%, $2,750,000
- Washington: 20%, $2,193,000
States with inheritance taxes (Iowa, Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania) also use 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 of 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)