You Mean There are State Death Taxes Too?

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Are There State Death Taxes?

That depends. Some states have a separate death tax and some do not. Historically, for those states that have a state death tax, the tax is either independent of the federal estate tax system or tied to the federal estate tax system. In those states that have an independent death tax, it is usually known as an “inheritance tax” and the tax is based upon the relationship of the beneficiaries to the deceased.

Some states have enacted their own state death tax with a lower exclusion amount than the federal estate tax exclusion. This means an individual who is not subject to the federal estate tax may still end up paying a state death tax. Under pre-2004 law, Congress provided a federal estate tax credit for state death taxes paid by an estate. Certain states, in turn, would collect a state death tax based on the amount of the credit. In 2004, the federal government repealed the state death tax credit.

Following the repeal, many states whose state death tax was based on the federal state death tax credit were no longer able to collect a state death tax. In order to recoup the lost revenue from repeal of the state death tax credit, these states have “decoupled” from the federal estate tax system to enact their own state death tax. Residents of these states will have to deal with planning for two different death tax systems, the federal and the state systems, and an individual who is not subject to the federal estate tax may still end up paying a state death tax.