Estate and Inheritance Taxes: 2023 Federal Guidelines and State Variations

You probably know that the federal government puts a tax on really big estates, the ones with a lot of money, starting at $12.92 million in 2023. They call this the “Applicable Exclusion Amount” (AEA), which increases yearly because of inflation. If you don’t remember that exact number, it’s okay – think of it as only affecting super-wealthy estates. Some might also know that this high AEA is temporary and will return to normal on January 1, 2026. Something called “portability” also lets the surviving spouse use their deceased partner’s leftover AEA.

For most folks, a basic understanding of federal estate taxes is enough to decide their estate plans. But if you live in a state with its own estate or inheritance tax, you must also know about that.

Estate Taxes vs. Inheritance Taxes

At the state level, there are two types of death taxes. Estate taxes are like the federal estate tax – they’re taxes on the estate itself. Inheritance taxes are different because they tax the people who inherit the property. Twelve states and the District of Columbia have estate taxes, while six have inheritance taxes. Maryland is unique because it has both and is one of only two states that allow portability. Hawaii is another state where portability can help.

Tax Rates by State

In most states with estate taxes, the more your estate is worth, the higher the tax rate. But in 2023, Connecticut and Vermont are exceptions because they have a flat tax rate. Connecticut taxes estates over $9.1 million at a flat 12% rate, while Vermont taxes estates over $5 million at a flat 16% rate.

Among the other states with estate taxes, seven have a top tax rate of 16%. Hawaii and Washington have the highest rate at 20%, and Maine has the lowest rate at 12% for estates over $6,410,000. These states also have different estate value levels exempt from taxes. Oregon has the lowest at just $1 million, while Connecticut matches the federal threshold of $12.92 million in 2023.

QTIP Deduction

Some states, like Illinois, Maine, Maryland, Massachusetts, Minnesota, Vermont, and Washington, offer a state Qualified Terminable Interest Property (QTIP) deduction. This means that if you put property into a trust for your surviving spouse, it usually wouldn’t qualify for a special deduction. But with the QTIP deduction, it does qualify. Interestingly, even though Kentucky and Pennsylvania don’t have a state estate tax, they recognize a state QTIP.

The rate can vary if you’re in a state with an inheritance tax. Kentucky and New Jersey have the highest rate at 16%. Iowa is phasing out its inheritance tax, and by 2025, it won’t exist anymore. In 2023, the top rate in Iowa is 6%. Most states with inheritance taxes don’t tax surviving spouses; some give exemptions or reductions for other close relatives.

In 1926, the federal government started a program that ensured people didn’t get taxed by their state and the federal government. But that’s changed. Now, because of new rules, some states, like Florida, have stopped collecting state estate taxes, while others, like Indiana, canceled their estate taxes before.

To Learn More, Talk to a Qualified Estate Planning Lawyer Today

This is just a tiny part of a big topic. If you’re worried about how estate and inheritance taxes might affect you and your loved ones, it’s a good idea to talk to a specialist like Annapolis estate planning attorney Raymond E. Brown from The Law Office of Raymond E. Brown. He can help you determine how these taxes could impact your financial planning. It’s also worth considering how state taxes might influence your decisions about where to live next if you’re a high-net-worth individual.

For more information like this, refer to the source of this article: Tereina Stidd.

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