You know what they say about death and taxes—and when it comes to estate taxes, sometimes death isn’t even the end. Estate tax is defined by the IRS as “a tax on your right to transfer property at your death”—or, in other words, the tax your executor will be made to pay on whatever you leave behind. But not every estate will have to pay taxes. Here are four things you must know about estate taxes and who owes them:
1. Location matters
You might not realize that there are both federal and state estate taxes. As of January 2018, the District of Columbia and 12 states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington) impose a state estate tax, while six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) have an inheritance tax (more on that in a minute). And yes, you read that right—Maryland imposes both.
The federal tax rate covers all 50 states and tops out at 40 percent, though on average, the effective rate is around 17 percent, according to the Tax Policy Center. (Deductions, discounts, and tax loopholes can all help lower an estate’s tax bill.) State tax rates vary: Washington’s rate is the highest, at up to 20 percent, while Maine and Connecticut are the lowest, at a maximum of 12 percent.
2. Whether your estate is taxed at all depends on its value
The estate tax rate is based on the “fair market value” of your assets when you die (not the amount you originally paid for them). Exemptions exist at both the federal and state level, and only the wealthiest estates typically pay taxes. In fact, according to the Joint Committee on Taxation, just two out of every 1,000 estates will be made to pay a federal estate tax.
How to know if yours will fall under that umbrella? The new tax bill (which covers the years 2018-2025) requires a filing for estates worth $10 million or more ($20 million for married couples). However, since that number is tied to inflation, it is projected to jump up to $11.2 million ($22.4 million for married couples) by the end of 2018.
On the state level, however, things once again vary. In Illinois, for instance, you’ll owe state estate taxes if your estate is larger than $4 million. But in Rhode Island, you’ll owe if your estate is valued at or above $850,000. And different states establish estate thresholds in different ways, so how much (if at all) that threshold rises will depend on where you live. Washington State’s $2 million exemption, for example, is indexed to inflation each year, while Rhode Island’s is tied to increases in the Consumer Price Index, and Hawaii’s is tied to the federal estate exemption.
3. Inheritance taxes aren’t the same as estate taxes
While an estate tax is levied against the value of the estate itself (meaning the estate pays the tax), an inheritance tax is levied against the person receiving the inheritance (meaning the heir pays the tax). Again, only six states have such a tax and the person’s estate has to be in one of those states to trigger it. So if you live in one of those states but the person who died didn’t (or didn’t have property in one of those states) you are still exempt. One’s relationship to the deceased may also trigger an exemption. Spouses, for instance, are exempt in all six states. In some, children and parents are also exempt.
4. You’ll need to file tax forms
If an estate meets or exceeds that $10 million federal threshold, the executor will need to file a Form 706—otherwise known as the United States Estate (and Generation-Skipping Transfer) Tax Return—within nine months of the decedent’s death. Total estate taxes also need to be paid during that time period.
Some states may also require the executor to file Form 706 at the state level. (Again, it varies by state.) And, of course, if the estate also qualifies on the state level for estate taxes there will be additional state-specific tax paperwork to file. All of which is why having a good estate attorney or accountant versed in your state’s rules and requirements is imperative.
By Brigid Sweeney
