02 Dec 2020 / 03:25 GMT
01 Articles Overview
02 Business Planning, Benefits & Strategies
03 S Corporations and C Corporations
04 Estate Tax, Discussion
05 Non profit corporation
06 Schedule C, Unincorporated Businesses
07 Section 1244 Stock
08 Stock transaction tax rules For Day Traders
09 Tax Treaty Countries
10 Trademarks
11 USA, State Death taxes
Articles of Interest
USA, State Death Taxes

  • Where you spend your last days could make a difference.

    As the federal estate tax marches toward oblivion (it's supposed to disappear in 2010), state death taxes will command much more attention. Right now, unless you and your spouse jointly own property worth more than $1 million, neither of you will come in contact with the federal tax. But your state may take a more active interest in what you leave behind. There are three kinds of state death taxes:
  • Pickup tax

    All 50 states and the District of Columbia levy this tax, and in 37 states and D.C. it is the only death tax. States traditionally used the pickup tax to absorb, or pick up, the dollar-for-dollar credit allowed on the federal-estate-tax return for death taxes actually paid to a state. So, if your estate owed no federal tax, it owed no pickup tax, either. But if it owed federal tax, the state received a share of what would have gone to the feds. In most states, that's still the way it works.
    Starting this year, however, the law that will eventually eliminate the federal tax also begins reducing the state-death-tax credit by 25% per year until it disappears in 2005. So a change that the U.S. Congress made is costing states money at a time when many of their budgets are already hurting. Rather than lose the revenue, several states have parted company with the new federal law -- including Arkansas, the District of Columbia, Kansas, Maine, Maryland, Minnesota, Nebraska, New York, Oregon, Rhode Island, Virginia, Washington and Wisconsin -- and others are considering it.
    The typical result is that estates worth more than $675,000 (the amount one could pass federal-estate-tax-free in 2001) must compute the death-tax credit as it stood in 2001. Estates of less than $1 million that don't owe federal tax may be hit by the state tax that used to piggyback on the federal levy almost unnoticed. (In Wisconsin, which has a complicated system combining old and new laws this year, and Maine, estates must exceed $1 million before this is necessary.)
    Keep an eye on this revolt among the states if you are considering relocating in retirement.
  • Inheritance tax

    Only 11 states -- Connecticut, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Hampshire, New Jersey, Pennsylvania and Tennessee -- still collect an inheritance tax that depends on who gets your property and how much they get. And it will soon be gone in New Hampshire (on January 1, 2003), Louisiana (July 1, 2004) and Connecticut (January 1, 2006).
    In all states, transfers of assets to a spouse are exempt from the inheritance tax; in some states, so are transfers to children and other close relatives. Typically, the more closely related your heirs are, the more they can inherit before the tax man steps in. For example, in New Jersey your spouse and children inherit assets tax-free. Your brother would be hit for 11% to 16%, after a $25,000 exemption, depending on how much he inherited, and a cousin or friend would pay 15% or 16% after a $500 exemption.
    Your heirs are responsible for paying the tax on the assets they receive, but the generally accepted practice is for the executor to actually pay it out of other estate assets.
  • Estate tax

    Ohio and Oklahoma are the only states that still have a tax that applies to the estate as a whole. Property left to a spouse is exempt in both states, but the tax kicks in sooner than the federal estate tax on assets left to others. For example, Ohioans can leave only $338,333 before tax is due. Above that amount, the estate-tax rate ranges from 2% to 7%.
    Your estate is subject to the death tax of your domicile, a legal term for the state you call home -- usually where you vote, have a driver's license, pay taxes and so on. If you split your year between two states, make sure your domicile is clear, or the states could wind up fighting over your estate. Real estate and tangible personal property, such as cars and boats, are always taxed in the state where they are located.
  • Federal estate tax

    The federal estate tax follows you no matter where you live out your days. This year it kicks in only if you leave more than $1 million to people other than your spouse. You can leave an unlimited amount to your husband or wife tax-free. That $1-million exemption for others is rising; it will hit $3.5 million in 2009.
    If your estate is large enough, the hit can be a big one. This year the top rate is a breathtaking 50%. Under current law, the federal estate tax disappears in 2010 -- for one year. Unless Congress acts, it will return in 2011.