The American Taxpayer Relief Act of 2012 has pretty much killed the federal estate tax beast for the majority of Americans, with exemptions at $5 million per taxpayer or $10 million for married taxpayers (with inflation adjustments, that actually comes to $5.25 million/$10.5 million in 2013).
But what about “state” estate taxes?
A recent Wall Street Journal editorial, titled “The Die Harder States,” reviews the current state of the estate tax – both at the federal and state levels – as well as the current state of our problems with it.
The state level estate tax is not a problem for most states in the union. Nevertheless, it is a problem worth understanding. This is certainly true if your retirement plans might involve one of those states where the estate tax still has teeth.
As noted in the editorial, 18 states (19, if you include the District of Columbia) exact some form of estate tax, sometimes in conjunction with their own form on inheritance and/or gift tax. Each jurisdiction does so to various degrees. Most of the taxing states apply their estate tax as under the former federal estate tax. Hawaii generally follows the federal rules, so if there is no federal tax, there is no Hawaii tax either. When the Hawaii death tax does kick in for estates over the federal exemption level, the tax is about 10%.
Given that the federal tax has been tamed as of late, the state estate taxes pose a potential trap for the unwary.
Granted, you may still “vote with your feet” when it comes to state laws. Accordingly, if you are looking to cut your overall estate taxation, then evaluate the laws of your state of residency and those of any potential states to which you may relocate in the future.
When state “shopping” for tax avoidance, remember the three rules every realtor knows: location, location, location.
You also need to bear in mind that if you live in a "tax free" state but you own real property located in state that imposes an estate tax, there could be state death tax to pay, even if there are no federal taxes or taxes imposed by your home jurisdiction. So look before you leap into any out of state investments.
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