In the United States, certain states collect a death tax based on the value of the deceased person’s estate and who inherits it.
Which States Collect a State Death Tax?
As of January 1, 2015, the following states collect a death tax: Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee (but it will be repealed in 2016), Vermont, and Washington.
Each of these states has its own laws governing the amount of assets that are exempt from the death tax, what deductions can be taken, and the applicable death tax rate. But regardless of these factors, for an estate to be potentially subject to a state death tax, the deceased person must have either lived in the state at the time of death or owned real estate or tangible personal property located in the state.
State Death Tax Examples
Some examples should help to illustrate when an estate may be potentially subject to a state death tax:
- Deceased Person was a New York resident. If you inherit your uncle’s estate and he lived in New York at the time of his death, will the estate potentially be subject to a state death tax? The answer is yes, because your uncle lived in New York at the time of his death and New York collects a state death tax. However, whether or not the estate will owe any New York death taxes will depend on the value of your uncle’s estate and what deductions can be taken.
- Deceased Person was a Florida resident. On the other hand, if your uncle lived in Florida at the time of his death and did not own any property located in New York, then his estate would not be subject to New York death taxes, nor would his estate owe any Florida death taxes since Florida does not collect a state death tax.
- Inheritor is a New York Resident. What if you inherit your uncle’s estate and he lived in Florida at the time of his death and he did not own any property located outside of Florida, and you live in New York, will your uncle’s estate be subject to the New York death tax? The answer is no, because your uncle was a Florida resident who did not own property located in New York, and Florida does not collect a state death tax. But what if your uncle, who was a Florida resident at the time of his death, owned a second home located in New York? In this case your uncle’s estate will potentially be subject to New York death taxes even though he was a Florida resident at the time of his death because he owned a house that is physically located in New York which is a state that collects a state death tax.
As the above examples show, state death taxes are tricky and can apply even in unexpected situations. Please contact our office if you have any questions about state death taxes.
Whitney Sorrell is a lawyer, CPA, and former IRS Revenue Agent and senior partner of Sorrell Law Firm, PLC, in Scottsdale, AZ. Mr. Sorrell’s law practice focuses on business organizations and federal tax planning, IRS dispute resolution, asset protection planning for small business owners, and estate planning for nigh net worth individuals.