Best States to Die In... For Taxes

Guide to State Inheritance Taxes

Best States to Die In... For Taxes
April 11, 2016

Does your ability to pass on your wealth to your heirs depend on where you live ... and die? Indeed it does. 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: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland. Most of those states exempt spouses and children, and siblings are often exempted as well. Nebraska is the only state where there are no 100% exemptions — immediate relatives are subject to a 1% tax on inheritance amounts above $40,000. Nebraska also has the highest top inheritance tax rate at 18%, while the others range from 10% to 16%.

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, two of the above are arguably the worst because they impose both inheritance and estate taxes. Maryland imposes a 16% tax on estates above $1.5 million, and New Jersey has a scaled estate tax ranging from 0.8% to 16.0% on estates over $675,000.

Here are the remaining states with estate taxes, along with the income exemption limit and range of tax rates, as of 2015 (with one exception in the following paragraph):

  • Connecticut: 7.2% to 12.0% tax on estates over $2 million.
  • Delaware: 0.8% to 16.0% tax on estates over $5.43 million.
  • Hawaii: 0.8% to 16.0% tax on estates over $5.43 million.
  • Illinois: 0.8% to 16.0% tax on estates over $4 million.
  • Maine: 8.0% to 12.0% tax on estates over $2 million.
  • Massachusetts: 0.8% to 16.0% tax on estates over $1 million.
  • Minnesota: 9.0% to 16.0% tax on estates over $1.4 million.
  • Oregon: 0.8% to 16.0% tax on estates over $1 million.
  • Rhode Island: 0.8% to 16.0% tax on estates over $1.5 million.
  • Vermont: 0.8% to 16.0% tax on estates over $2.75 million.
  • Washington: 10.0% to 20.0% tax on estates over $2.054 million.
  • District of Columbia: 0.8% to 16.0% tax on estates over $1 million.

Tennessee was on this list through 2015, with an inheritance tax exemption limit that rose for four consecutive years (up to $5 million in 2015). Their estate tax ends for the 2016 tax year and beyond. Tennessee's legislature believes that this will attract wealthy retirees to the state and stop the flight of the ones they already have. Time will tell if they are right.

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.

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STOKES | 04.12.16 @ 14:00
North Carolina isn't mentioned. I guess I don't have to worry about it?
Carla | 04.12.16 @ 14:02
I always thought that estate taxes and inheritance taxes were the same thing. This is great to know.
Erin | 04.12.16 @ 14:03
I guess I may have to reconsider living in Maryland when I become fabulously wealthy. Until that time, I'm quite content where I am. Interesting information. I expected more states to have some kind of inheritance tax.
Steffanie | 04.12.16 @ 14:05
My state didn't make the cut, but not worth moving for it. I just assumed it was the same in every state.
Carla | 04.12.16 @ 14:08
Alabama isn't mentioned so I am guessing that I am not going to leave my heirs owing a lot from what little I have.
Jonathan | 04.12.16 @ 14:08
No luck... I live in NC lol
irene | 04.12.16 @ 14:11
Oh dear, I am "happy to say my state made the list although that is a morbid thought LOL
Rindy | 04.12.16 @ 14:15
I never gave any thought to this until my father passed away 3 years ago now. Then in the middle of grief and as an Executor of his estate, I was forced to d a crash course on all the laws and taxes. This is an important topic that we all need to be aware of and before you have to deal with it.
$commenter.renderDisplayableName() | 02.17.19 @ 20:21

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