Does Your State Have an Estate or Inheritance Tax?

by Jared Walczak, The Tax Foundation, May 25, 2016

In addition to the federal estate tax of 40 percent (which is fourth highest in the OECD), many U.S. states levy their own estate and inheritance taxes.  Estate taxes are charged against the estate regardless of who inherits the assets, while 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 and experience different rates, which we list in detail in table 35 in the 2016 edition of Facts & Figures.

Currently, fourteen states and the District of Columbia impose an estate tax while 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 ten states and the District of Columbia with a top rate of 16 percent. Delaware and Hawaii have the highest exemption thresholds, which at $5,450,000 match the federal exemption. At $675,000, New Jersey’s exemption is the lowest.

Of the six states with inheritance taxes, Kentucky and New Jersey have the highest top rates at 16 percent. Maryland offers the lowest top rate, at 10 percent. All six states exempt spouses, and some go farther to exempt immediate relatives or lineal heirs.

Tennessee repealed its estate tax (confusingly called an inheritance tax by the state) this year, the culmination of a multi-year phase-out, and Indiana completed the repeal of its inheritance tax in 2013. 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, tend to suppress entrepreneurship, and are among the most harmful taxes to economic growth, which helps explain why states continue to shift away from them.

Click here for more information on estate and inheritance taxes.

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