A Primer on Estate Taxes – Federal and State

What is Subject to Estate Taxes?

All the assets of a deceased person that are worth $12.06 million or more in 2022 are subject to federal estate taxes. That amount increases to $12.92 million in tax year 2023 and is then taxed at a rate of 18% to 40%.  Typical deductions from the gross value of the estate to determine if it is under the exemption amount include funeral and burial expenses, estate administration expenses (court fees, accountants, attorneys, expenses in collecting assets, paying debts, and distributing assets), charitable donations, and payment of state estate or inheritance taxes.

An estate tax is levied on the estate itself and an inheritance tax is levied against those who receive an inheritance from an estate.

State Estate Taxes 

An estate tax is assessed by the state in which the decedent (person who passed away) was living at the time of death. If a person lives in a state that has an estate tax, the exemptions for state and district estate taxes are all less than halfthose of the federal assessment. Following are the jurisdictions that have estate taxes: 

Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington state.

The tax rate is calculated on a sliding basis, typically 10% or so for amounts just over the threshold, and it rises in steps, usually to 16%. The top estate tax rate is lowest in Connecticut, at 12%, and highest in Washington State, where it tops out at 20%.

State Inheritance Taxes 

Inheritance tax is assessed by the state in which the inheritor is living.  Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all have these taxes.  Whether an inheritance will be taxed and at what rate depends on its value, the relationship to the person who passed away, and the prevailing rules and rates where the inheritor lives.

As with estate tax, an inheritance tax is applied only to the sum that exceeds the exemption.  Tax is assessed on a sliding basis above those thresholds. Rates typically begin in the single digits and rise to between 15% and 18%. Both the exemption amount and the rate charged may vary by the person’s relationship to the decedent—more so than with the value of assets inherited. Generally, the closer the person is to the decedent, the lower the rate paid. Surviving spouses are exempt from inheritance tax in all six states. Domestic partners, too, are exempt in New Jersey. Descendants pay no inheritance tax except in Nebraska and Pennsylvania.  

Other Benefits

Some states offer reductions in taxes for widows or widowers. For example, in Florida a surviving spouse is entitled to receive a reduction in the taxable value of a property they own by $500 each year, in perpetuity, or until they remarry.