Almost every single day, I have to explain the Federal Estate Tax. The people I have to explain the federal estate tax to are not tax professionals, they are either financial advisors, other attorneys, or successful business owners. So, needless to say, I better explain estate taxes from 30,000 feet above. The details do not matter nearly as much as the idea of how the estate tax works, or more importantly how the estate tax will affect them or their clients.
In the past I explained how to easily calculate the Federal Estate Tax, but lets focus on the point that the threshold is $3,500,000; so if you are among the 96 to 98% of Americans with less than that amount, you generally won’t be affected by the Federal Estate Tax. Read Again, despite the media’s attack on the “death tax” the federal estate tax does notaffect about 96% of the United States Population. The number varies from 96% to 98% depending on the year, but lets get it straight, the Federal Estate Tax does not affect most people, irrelevant of how you want to define “most.”
Right about now, you should be thinking – then what the hell did you write this post for? The answer: State Estate Taxes
State Estate Tax – Decoupled States
That being said there is a ‘death tax’ that does affect a lot more people across 18 different states. These States are often referred to as Decoupled States. Basically, what went down was this:
- Within the Bush Tax Cuts was a provision which brought up that threshold number from $675,000 to $3,500,000 over the past decade.
- A few States basically said, “Woah, federal guys just cause you want to give up some tax dollars does not mean we want to.”
- 18 States said screw your new system we are locking our number in way lower than $3,5000,000.
As one could imagine it is a little more complicated, and a lot more conversation, than my 3 bullet points, but the idea is simple – don’t just assume just because your heirs aren’t paying the U.S. Government, doesn’t mean they won’t be paying your state.
What States have a Decoupled Estate Tax?
I found a great chart from About.com (read: means I can’t verify the chart’s accuracy since I didn’t go researching all the different states, but New York is correct).
| State | Exemption Amount |
| Connecticut | $2,000,000 |
| Delaware | $3,500,000 |
| D.C. | $1,000,000 |
| Illinois | $2,000,000 |
| Kansas | $1,000,000 |
| Maine | $1,000,000 |
| Maryland | $1,000,000 |
| Massachusetts | $1,000,000 |
| Minnesota | $1,000,000 |
| New Jersey | $675,000 |
| New York | $1,000,000 |
| North Carolina | $3,500,000 |
| Ohio | $338,333 |
| Oregon | $1,000,000 |
| Rhode Island | $675,000 |
| Tennessee | $1,000,000 |
| Vermont | $2,000,000 |
| Washington | $2,000,000 |
I am not sure about the other states, but in New York the effective tax rate is approximately 10%. So if the decedent is worth $2,000,000 they probably don’t think they have an estate tax problem, but their heirs will be shocked when New York hands them a bill for approximately $99,600!
Anyone ever learn about a Decoupled State the Hard Way?
Ah, interesting.
Couple questions:
1) Where's California on the list?
2) Why is the bill $99,600 on $2mil inheritance if the effecitve NYC tax rate is 10%. Shouldn't it be $200,000?
I'm pumped you have all this info! I will be studying all your posts extensively over the weekend! Perhaps you'd like to do a guest post as well. whoo hoo!
1) Cali isn't on the list because when the state/federal estate taxes got decoupled they basically said, don't worry about it we are willing to take whatever the Federal Gov't is willing to allow us to have vs. New York who said “Whoa, we make way too much money from the state estate tax – you ain't ripping it away from us, Bush” (that is how we New Yawkers Talk).
2) Because you chop off what the State Lets you distribute prior to tacking on the tax. So,
$2,000,000 Estate
-$1mil (Exemption amount)
= $1,000,000 Taxable Estate X 10%ish = $99,600