State Estate Taxes

I don't mind others makin' a buck on the holiday; I just think it's only fair that I get a cut, too. - S. Claus.

This may come as a shock, but most people pay more in state and local taxes than they do in federal taxes. If you factor in the various sales and use taxes, income taxes, property taxes, excise taxes (e.g. liquor, cigarettes, gasoline) and other state and local taxes imposed on the average taxpayer, you'll find that over half the money that you pay to the government never leaves your state. It is no wonder, then, that states want to hit you up for money one more time after you die. After all, if the federal government does it, why can't they?

State death taxes can include any combination of the following three major categories:

• pick-up taxes intended to make use of the federal credit for state death tax allowed under federal estate tax laws
• inheritance taxes
• estate taxes

Many states levy an estate tax in the exact amount of the Internal Revenue Code Sec. 2011 credit for state death taxes allowed under the federal estate tax laws. This is often referred to as a "pick-up" tax. In such states, the states' estate tax laws essentially pick up any slack created under the federal laws.

An inheritance tax is levied on the right to receive property by inheritance. Beneficiaries are divided into classes according to the closeness or remoteness of their relationship to the decedent, with different exemptions and tax rates applied to each class. Generally, the closer the relationship, the greater the exemption and the lower the tax.

In the coming years, there will most likely be a lot of changes to the way states impose their estate taxes. For example, the substantial changes to the federal estate tax laws enacted in 2001 under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) include the gradual phase-out of the state death tax credit. This means that states with only a pick-up tax in place will entirely lose their estate tax revenues unless additional state estate taxes are enacted (which many have already done). Just keep in mind that the billions of dollars of associated lost state revenues will have to be made up somewhere. (Translation: look for some form of higher state taxes imposed to make up the shortfall.)

Realizing that this area is now in a state of flux (no pun intended), we've done our best to outline the basics of the estate tax laws in the 50 states, the District of Columbia, and Puerto Rico. To find out about the state estate taxes that may apply to your situation, click on your area on the map below.