Credit for State Death Taxes
Prior to 2005, federal estate tax law allowed a credit against the federal estate tax for any estate, inheritance, legacy, or succession taxes actually paid to any state of the United States or the District of Columbia with respect to any property included in a decedent's gross estate. This credit did not include any taxes paid with respect to the estate of a person other than the decedent.
The credit for state death taxes was available only to the extent that it did not exceed the estate's federal tax liability after reduction by the unified credit. The maximum allowable state death tax credit was based on the size of the "adjusted taxable estate," which, for purposes of the credit, was the taxable estate reduced by $60,000 (the amount of the specific exemption allowed before 1977).
Code Sec. 2011 of the Internal Revenue Code prescribed a graduated rate table (see below) under which the maximum amount of credit allowable for state death taxes was determinable. The credit was allowed only with respect to that part of the adjusted taxable estate that exceeds $40,000.
| State Death Tax Credit Table |
| Adjusted Taxable Estate From: |
To: |
Credit |
Plus Percentage Rate |
On Excess Over: |
| $0 |
$40,000 |
$0 |
0% |
$0 |
| $40,000 |
$90,000 |
$0 |
0.8% |
$40,000 |
| $90,000 |
$140,000 |
$400 |
1.6% |
$90,000 |
| $140,000 |
$240,000 |
$1,200 |
2.4% |
$140,000 |
| $240,000 |
$440,000 |
$3,600 |
3.2% |
$240,000 |
| $440,000 |
$640,000 |
$10,000 |
4% |
$440,000 |
| $640,000 |
$840,000 |
$18,000 |
4.8% |
$640,000 |
| $840,000 |
$1,040,000 |
$27,600 |
5.6% |
$840,000 |
| $1,040,000 |
$1,540,000 |
$38,800 |
6.4% |
$1,040,000 |
| $1,540,000 |
$2,040,000 |
$70,800 |
7.2% |
$1,540,000 |
| $2,040,000 |
$2,540,000 |
$106,800 |
8% |
$2,040,000 |
| $2,540,000 |
$3,040,000 |
$146,800 |
8.8% |
$2,540,000 |
| $3,040,000 |
$3,540,000 |
$190,800 |
9.6% |
$3,040,000 |
| $3,540,000 |
$4,040,000 |
$238,800 |
10.4% |
$3,540,000 |
| $4,040,000 |
$5,040,000 |
$290,800 |
11.2% |
$4,040,000 |
| $5,040,000 |
$6,040,000 |
$402,800 |
12% |
$5,040,000 |
| $6,040,000 |
$7,040,000 |
$522,800 |
12.8% |
$6,040,000 |
| $7,040,000 |
$8,040,000 |
$650,800 |
13.6% |
$7,040,000 |
| $8,040,000 |
$9,040,000 |
$786,800 |
14.4% |
$8,040,000 |
| $9,040,000 |
$10,040,000 |
$930,800 |
15.2% |
$9,040,000 |
| $10,040,000 |
------------ |
$1,082,800 |
16% |
$10,040,000 |
Phase out and repeal of credit. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gradually phased out the state death tax credit between 2002 and 2004, fully repealing the credit for the estates of decedents dying after December 31, 2004. Beginning in 2005, the state death tax credit was replaced by a deduction for state death taxes paid, which continues to apply until the repeal of the estate tax in 2010. The credit was reduced by 25 percent for the estates of decedents dying in 2002, 50 percent for the estates of decedents dying in 2003 and 75 percent for the estates of decedents dying in 2004.
Without a further change in the federal estate tax law by Congress prior to 2011, the state death tax credit will spring back to life to replace the deduction for state death taxes for the estates of decedents who die in 2011 and beyond.
To illustrate the operation of the phase out, the maximum state death tax credit allowable for decedents dying in 2002 through 2004 under EGTRRA (applicable to those adjusted taxable estates over $10,040,000) was as follows: for 2002, $812,100 plus 12 percent of the excess over $10,040,000; for 2003, $541,400 plus 8 percent of the excess over $10,040,000; and for 2004, $270,700 plus 4 percent of the excess over $10,040,000.
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