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Federal estate taxes apply no matter where you live within the U.S., but eighteen states subject their citizens to estate taxes or inheritance taxes. The difference between the two is that estate taxes are subtracted from an estate before it is dispersed to the heirs, while the inheritance tax applies to the heirs — even if they live in a different state than the deceased.
Inheritance taxes only apply in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. All of these states completely exempt spouses from paying inheritance tax, and New Jersey exempts domestic partners, too. Children and siblings are also often exempted.
Nebraska and Pennsylvania are the only states where children and grandchildren are not exempted — in Nebraska, immediate relatives are subject to a 1 percent tax on inheritance amounts above $40,000, while in Pennsylvania, tax rates start at 4.5 percent of inheritances for children and lineal heirs. Nebraska has the highest top inheritance tax rate of the states at 18 percent, while the others range from 10 percent to 16 percent.
Each state has exemptions based on the amount of the inheritance and the heir's relationship to the deceased, which vary from state to state. If you receive an inheritance from someone who lived in one of the inheritance-tax states, check that state's laws for details. States categorize heirs into types for the purposes of assigning exemptions and tax rates, ranging from two categories in Maryland to seven in Iowa.
While any of the other 32 states are by definition the "best" states to die in due to lack of applicable state taxes, one of the above is arguably the worst because it imposes both inheritance and estate taxes.
Maryland imposes a 16 percent tax on estates above $4 million for decedents dying in calendar year 2018. Until recently, New Jersey had a scaled estate tax ranging from 0.8 percent to 16.0 percent on estates over $675,000, but the state no longer imposes any estate tax on the estates of decedents who die on or after January 1, 2018.
Here are the remaining states with estate taxes, along with the income exemption limit and range of tax rates, as of 2019:
- Connecticut: 7.2 percent to 12.0 percent tax on estates over $2.6 million.
- Hawaii: 10.0 percent to 15.7 percent tax on estates over $5.49 million.
- Illinois: 0.8 percent to 16.0 percent tax on estates over $4 million.
- Maine: 8.0 percent to 12.0 percent tax on estates over $5.6 million.
- Massachusetts: 0.8 percent to 16.0 percent tax on estates over $1 million.
- Minnesota: 12.0 percent to 16.0 percent tax on estates over $2.4 million.
- Oregon: 10.0 percent to 16.0 percent tax on estates over $1 million.
- Rhode Island: 0.8 percent to 16.0 percent tax on estates over $1.538 million.
- Vermont: 16.0 percent tax on estates over $2.75 million.
- Washington: 10.0 percent to 20.0 percent tax on estates over $2.193 million.
- District of Columbia: 12 percent to 16.0 percent tax on estates over $5.6 million.
Since inheritances are often passed through to spouses and children, and the exemption sizes are generally large, most people are not going to run into any issues with estate or inheritance taxes. However, it is a good idea to understand the inheritance and estate tax situation in your state.
State laws can be subject to frequent change, so as you start your estate planning process, give the tax rates in your state another look. Your heirs will thank you in advance.