Estate taxes were thought only be levied on the wealthy. State-specific estate taxes are only levied on individuals with roughly $1 million in assets, but they can take a large chunk out of anyone's leftover estate. A person's home, retirement accounts and life insurance can count when an estate is valued for tax purposes.
Taxpayers in some states are paying more on state estate taxes than even federal estate taxes. The federal applicable exclusion for estate taxes is $5.43 million in 2015, but many states have lower thresholds, casting a larger net and impacting more taxpayers.
New Jersey is one of only two states to impose both an estate tax and an inheritance tax. New Jersey's exemption level at which estate taxes kick in is, by far, the lowest in the country at $675,000. If a person has an estate of over $675,000 and lives in New Jersey, he has to pay between 4.8 and 16%, depending on the actual size of his net worth.
New Jersey also has a three-year look-back on gifts considered to be in contemplation of death, which could result in additional inheritance taxes. Lawmakers have been working toward reducing the number of taxpayers affected, but New Jersey remains one of the worst states for those subject to estate taxes.
Oregon is the state with the second-lowest exemption level, up from the number four spot a year earlier. The state has resisted the trend to increase estate tax exemptions or adjust them for inflation. The state's tax kicks in for estates valued at $1 million or more, and it also imposes a relatively high estate tax rate of 10 to 15% based on the size of the estate.
Massachusetts, similar to Oregon, has an exemption level of $1 million. While there is no inheritance tax, it charges between 5.6 and 16% for qualifying estates. However, the state offers exemptions for spouses and allows for unlimited charitable deductions for property left to a qualified charity.
Maryland is the only other state besides New Jersey to assess both an estate tax and an inheritance tax. The estate tax exemption increased in 2015 to $1.5 million, but tax rates still range from 5.6 to 16%. While Maryland can still be expensive for beneficiaries and inheritors, tax rates will gradually improve over time. The state has reported that for each year until 2019, the exemption amount will increase until it is close to the federal exemption of more than $5 million.
Connecticut, with an estate tax exemption of $2 million and tax rates of 7.2 to 12%, appears less costly than many states. However, it has closed some loopholes that are used in other states to circumvent the estate tax. It is the only state to assess gift taxes on lifetime gifts greater than $2 million, so be aware of the tax impact of gifting prior to death.
Minnesota is gradually increasing its estate tax exemption by $200,000 a year until 2018 when it will reach $2 million. Even then, the state has a current exemption of $1.4 million, so there is a significant distance between the state’s estate tax threshold and the federal exemption. The estate tax rate is between 5.6 and 16%. Minnesota also looks back to include taxable gifts made within three years prior to death.
Rhode Island's estate tax exemption increased significantly in 2015, from just over $900,000 to $1.5 million. The state plans on increasing its exemption each year to keep up with inflation. Its estate tax rate is between 5.6 and 16%.
Main has an estate tax exemption of $2 million with a tax rate of 8 to 12%. However, even if a person's estate is below the exemption threshold, it must file an abbreviated version of the estate tax return to remove an automatic tax lien on all Maine property in the estate.