State Estate Taxes

I'm putting all my money in taxes--it's the only thing that's sure to go up! - Anonymous Investor.

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 their piece of the pie one more time after you die. After all, if the federal government does it, why can't they?

State death taxes come in two basic forms:

• inheritance taxes
• estate taxes

Prior to 2005, many states levied 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 was often referred to as a "pick-up" tax. In such states, the states' estate tax laws essentially picked up any slack created under the federal laws. However, in 2005, the credit for state death taxes was fully phased out of the federal tax law and replaced with a deduction for state death taxes. As a result, some states simply eliminated their "pick-up" inheritance tax, while others "decoupled" from the federal tax changes and still use some of the old provisions of the federal tax law in calculating the amount of the state estate tax. Some states have estate tax laws that are independent of the federal estate tax 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.

Realizing that state estate and inheritance taxes are playing a more significant role now than in prior years, we've done our best to outline the basics of the tax laws in the 50 states, the District of Columbia, and Puerto Rico. To find out about the estate taxes and inheritance taxes that may apply to your situation, click your location on the map below.