Estate and inheritance taxes
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Estate and inheritance taxes are levied on the property of deceased individuals (decedents). These taxes are levied by both the federal government and some state governments. Although the terms "estate tax" and "inheritance tax" are sometimes used synonymously, there are differences between the two. Generally speaking, an estate tax is applied to the value of a decedent's property and is paid from the estate before distribution to any heirs. Conversely, an inheritance tax is paid by the heir or heirs of a decedent's assets.[1][2][3]
Federal estate tax
The Internal Revenue Service defines the estate tax as "a tax on your right to transfer property at your death." An estate consists of a deceased individual's property, which can include real estate, cash, business interests, stocks and other assets. As of 2015, only estates with a taxable value of more than $5.43 million were subject to the tax. This exemption threshold changes according to inflation; see the table below. The maximum rate of estate tax is 40 percent.[2][4][5]
The estate tax was first levied by the federal government in 1916. The maximum estate tax rate peaked at 77 percent between 1941 and 1976. Between 1977 and 2012, the rate declined to 35 percent. In 2013, the rate increased to 40 percent. The table below details historical estate tax rates.[6]
| Historical federal estate tax rates | ||
|---|---|---|
| Year(s) | Exemption threshold | Maximum tax rate |
| 1916 | $50,000 | 10% |
| 1917-1923 | $50,000 | 25% |
| 1924-1925 | $50,000 | 40% |
| 1926-1931 | $100,000 | 20% |
| 1932-1933 | $50,000 | 45% |
| 1934 | $50,000 | 60% |
| 1935-1937 | $40,000 | 70% |
| 1938-1940 | $40,000 | 70% |
| 1941 | $40,000 | 77% |
| 1942-1976 | $60,000 | 77% |
| 1977 | $120,000 | 70% |
| 1978 | $134,000 | 70% |
| 1979 | $147,000 | 70% |
| 1980 | $161,000 | 70% |
| 1981 | $175,000 | 70% |
| 1982 | $225,000 | 65% |
| 1983 | $275,000 | 60% |
| 1984 | $325,000 | 55% |
| 1985 | $400,000 | 55% |
| 1986 | $500,000 | 55% |
| 1987-1997 | $600,000 | 55% |
| 1998 | $625,000 | 55% |
| 1999 | $650,000 | 55% |
| 2000-2001 | $675,000 | 55% |
| 2002 | $1,000,000 | 50% |
| 2003 | $1,000,000 | 49% |
| 2004 | $1,500,000 | 48% |
| 2005 | $1,500,000 | 47% |
| 2006 | $2,000,000 | 46% |
| 2007-2008 | $2,000,000 | 45% |
| 2009 | $3,500,000 | 45% |
| 2010 | $5,000,000 | 35% |
| 2011 | $5,000,000 | 35% |
| 2012 | $5,120,000 | 35% |
| 2013 | $5,250,000 | 40% |
| 2014 | $5,340,000 | 40% |
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014," February 4, 2014 | ||
State inheritance and estate taxes
Some states levy additional estate and inheritance taxes. According to a 2016 report by the Tax Foundation, a total of 15 states and the District of Columbia levy an estate tax, while six states levy an inheritance tax. Only two states, Maryland and New Jersey, levy both an estate tax and an inheritance tax.[3]
2016
The table below summarizes the estate tax rates of the 50 states in 2016..[7][8][9]
| Estate taxes, 2016 | |||
|---|---|---|---|
| State | Exemption threshold | Minimum rate | Maximum rate |
| Alabama | N/A | ||
| Alaska | N/A | ||
| Arizona | N/A | ||
| Arkansas | N/A | ||
| California | N/A | ||
| Colorado | N/A | ||
| Connecticut | $2,000,000 | 7.20% | 12.00% |
| Delaware | $5,450,000 | 0.80% | 16.00% |
| Florida | N/A | ||
| Georgia | N/A | ||
| Hawaii | $5,450,000 | 0.80% | 16.00% |
| Idaho | N/A | ||
| Illinois | $4,000,000 | 0.80% | 16.00% |
| Indiana | N/A | ||
| Iowa | N/A | ||
| Kansas | N/A | ||
| Kentucky | N/A | ||
| Louisiana | N/A | ||
| Maine | $5,450,000 | 8.00% | 12.00% |
| Maryland | $2,000,000 | 16.00% | 16.00% |
| Massachusetts | $1,000,000 | 0.80% | 16.00% |
| Michigan | N/A | ||
| Minnesota | $1,600,000 | 9.00% | 16.00% |
| Mississippi | N/A | ||
| Missouri | N/A | ||
| Montana | N/A | ||
| Nebraska | N/A | ||
| Nevada | N/A | ||
| New Hampshire | N/A | ||
| New Jersey | $675,000 | 0.80% | 16.00% |
| New Mexico | N/A | ||
| New York | $3,125,000 | 3.06% | 16.00% |
| North Carolina | N/A | ||
| North Dakota | N/A | ||
| Ohio | N/A | ||
| Oklahoma | N/A | ||
| Oregon | $1,000,000 | 10.00% | 16.00% |
| Pennsylvania | N/A | ||
| Rhode Island | $1,500,000 | 0.80% | 16.00% |
| South Carolina | N/A | ||
| South Dakota | N/A | ||
| Tennessee | N/A | ||
| Texas | N/A | ||
| Utah | N/A | ||
| Vermont | $2,750,000 | 0.80% | 16.00% |
| Virginia | N/A | ||
| Washington | $2,078,000 | 10.00% | 20.00% |
| West Virginia | N/A | ||
| Wisconsin | N/A | ||
| Wyoming | N/A | ||
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015 | |||
2015
The table below summarizes 2015 estate tax rates. Washington levied the highest maximum estate tax rate at 19 percent. Meanwhile, Tennessee levied the lowest maximum estate tax rate at 9.5 percent. Tennessee's estate tax was phased out in 2016.[3][9]
| Estate taxes, 2015 | |||
|---|---|---|---|
| State | Exemption threshold | Minimum rate | Maximum rate |
| Connecticut | $2,000,000 | 7.2% | 12% |
| Delaware | $5,430,000 | 0.8% | 16% |
| Hawaii | $5,430,000 | 0.8% | 16% |
| Illinois | $4,000,000 | 0.8% | 16% |
| Maine | $2,000,000 | 8% | 12% |
| Maryland | $1,500,000 | 16% | 16% |
| Massachusetts | $1,000,000 | 0.8% | 16% |
| Minnesota | $1,400,000 | 9% | 16% |
| New Jersey | $675,000 | 0.8% | 16% |
| New York | $2,062,500 | 3.06% | 16% |
| Oregon | $1,000,000 | 0.8% | 16% |
| Rhode Island | $1,500,000 | 0.8% | 16% |
| Tennessee | $5,000,000 | 5.5% | 9.5% |
| Vermont | $2,750,000 | 0.8% | 16% |
| Washington | $2,054,000 | 10% | 2% |
| District of Columbia | $1,000,000 | 0.8% | 16% |
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015 | |||
A total of six states levy an inheritance tax. The table below summarizes the inheritance tax rates for these six states in 2015. Inheritance tax liability often varies depending on the relationship of the heir to the decedent. For instance, a decedent's spouse or child may have a different inheritance tax liability than the decedent's sibling or a friend.
For the purposes of the below table, Class A beneficiaries are spouses, children and often siblings. Class B beneficiaries are non-immediate family members. Class C beneficiaries are non-family members. Class D is for-profit organizations, Class E is foreign charitable organizations, Class F is unknown heirs and Class G is recognized charities.[9]
| Inheritance taxes, 2015 | |||
|---|---|---|---|
| State | Heir type | Exemption threshold | Rates |
| Iowa | Class A Class B Class C Class D Class E Class F Class G |
100% exempt No exemption No exemption No exemption No exemption No exemption 100% Exempt |
0% 5% to 10% 10% to 15% 15% 10% 5% 0% |
| Kentucky | Class A Class B Class C |
100% exempt $1,000 $500 |
0% 4% to 16% 6% to 16% |
| Maryland | Spouses and lineal heirs Others |
100% exempt No exemption |
0% 10% |
| Nebraska | Immediate relatives Remote relatives Others |
$40,000 $15,000 $10,000 |
1% 13% 18% |
| New Jersey | Class A Class C Class D Class E |
100% exempt $25,000 $500 100% Exempt |
0% 11% to 16% 15% to 16% 0% |
| Pennsylvania | Spouses Lineal heirs Siblings Others |
100% exempt No exemption No exemption No exemption |
0% 4.5% 12% 15% |
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015 | |||
2014
The table below summarizes 2014 estate tax rates. Washington levied the highest maximum estate tax rate at 19 percent. Meanwhile, Tennessee levied the lowest maximum estate tax rate at 9.5 percent.[3]
| Estate taxes, 2014 | |||
|---|---|---|---|
| State | Exemption threshold | Minimum rate | Maximum rate |
| Connecticut | $2,000,000 | 7.2% | 12.0% |
| Delaware | $5,340,000 | 0.8% | 16.0% |
| Hawaii | $5,340,000 | 10% | 15.7% |
| Illinois | $4,000,000 | 0.8% | 16.0% |
| Maine | $2,000,000 | 8.0% | 12.0% |
| Maryland | $1,000,000 | 0.8% | 16.0% |
| Massachusetts | $1,000,000 | 0.8% | 16.0% |
| Minnesota | $1,000,000 | 0.8% | 16.0% |
| New Jersey | $675,000 | 0.8% | 16.0% |
| New York | $1,000,000 | 0.8% | 16.0% |
| Oregon | $1,000,000 | 0.8% | 16.0% |
| Rhode Island | $921,655 | 0.8% | 16.0% |
| Tennessee | $2,000,000 | 5.5% | 9.5% |
| Vermont | $2,750,000 | 0.8% | 16.0% |
| Washington | $2,012,000 | 10.0% | 19.0% |
| District of Columbia | $1,000,000 | 0.8% | 16.0% |
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Facts and Figures 2014: How Does Your State Compare?" March 18, 2014 | |||
The table below summarizes 2014 inheritance tax rates and provisions. Inheritance tax liability often varies depending on the relationship of the heir to the decedent. For instance, a decedent's spouse or child may have a different inheritance tax liability than the decedent's sibling or a friend. For the purposes of the below table, Class A heirs are defined as "spouses, children and often siblings." Non-immediate family members are considered Class B heirs, while non-family beneficiaries are considered Class C heirs. In New Jersey, Class A heirs are defined generally as parents, grandparents, spouses and children. Class C heirs are siblings and spouses of children, and Class D heirs are all other beneficiaries.[3][10]
| Inheritance taxes, 2014 | |||
|---|---|---|---|
| State | Heir type | Exemption threshold | Rates |
| Iowa | Class A Class B Class C |
100% exempt No exemption No exemption |
0% 5% to 10% 10% to 15% |
| Kentucky | Class A Class B Class C |
100% exempt $1,000 $500 |
0% 4% to 16% 6% to 16% |
| Maryland | Spouses and lineal heirs Others |
100% exempt No exemption |
0% 10% |
| Nebraska | Immediate relatives Remote relatives Others |
$40,000 $15,000 $10,000 |
1% 13% 18% |
| New Jersey | Class A Class C Class D |
100% exempt $25,000 $500 |
0% 11% to 16% 15% to 16% |
| Pennsylvania | Spouses Lineal heirs Siblings Others |
100% exempt $4,500 No exemption No exemption |
0% 4.5% 12% 15% |
| Note: For complete notes and annotations, please see the source below. Source: Tax Foundation, "Facts and Figures 2014: How Does Your State Compare?" March 18, 2014 | |||
Debate
The estate tax is a source of considerable controversy. In 2009, Representative Jared Polis (D-Colorado) argued in favor of the estate tax. "Without the estate tax," he said, "you in effect have an aristocracy of the wealthy, which means you pass down the ability to command resources of the nation based on heredity rather than merit. America is and should be a meritocracy." Chye-Ching Huang and Nathaniel Frentz, in a 2013 report for the Center on Budget and Policy Priorities, praised the tax as "an important source of federal revenue for nearly a century" that "limits, to a modest degree, the large tax breaks that extremely wealth households get on their wealth as it grows, which can otherwise go completely untaxed."[11]
Meanwhile, critics contend that estate and inheritance taxes are tantamount to "death taxes." In 2009, Representative Louie Gohmert (R-Texas) said, "After someone dies, and someone comes in and steals from them, we consider that reprehensible, that's just despicable. But when the government comes in—because we have the power to pass laws and legalize theft—it's OK." The Tax Foundation has argued that "estate taxes discourage entrepreneurship and lead to large tax compliance costs."[11][12]
See also
External links
Footnotes
- ↑ About.com, "What's the Difference Between an Estate Tax and an Inheritance Tax?" accessed October 16, 2014
- ↑ 2.0 2.1 Internal Revenue Service, "Estate Tax," updated September 29, 2014
- ↑ 3.0 3.1 3.2 3.3 3.4 Tax Foundation, "State Estate and Inheritance Taxes in 2014," May 28, 2014
- ↑ Forbes, "After the Fiscal Cliff Deal: Estate and Gift Tax Explained," January 1, 2013
- ↑ Center on Budget and Policy Priorities, "Myths and Realities About the Estate Tax," revised August 29, 2013
- ↑ Tax Foundation, "Federal Estate and Gift Tax Rates, Exemptions, and Exclusions, 1916-2014," February 4, 2014
- ↑ About.com, "What's the Difference Between an Estate Tax and an Inheritance Tax?" accessed October 16, 2014
- ↑ Internal Revenue Service, "Estate Tax," updated September 29, 2014
- ↑ 9.0 9.1 9.2 Tax Foundation, "Facts and Figures, 2015," accessed October 6, 2015
- ↑ New Jersey Division of Taxation, "General Information: Inheritance and Estate Tax," accessed October 16, 2014
- ↑ 11.0 11.1 NPR, "The Estate Tax Explained: Who It Hits and Doesn't," December 4, 2009
- ↑ Tax Foundation, "Estate and Gift Taxes," accessed October 16, 2014
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