State Estate & Inheritance Taxes

A lot is often said about the US federal estate tax, especially amongst Canadians with US property. What many Canadians do not realize is that 14 different US states, and Washington, D.C., levy state estate tax as well. An additional five states levy an inheritance tax, with New Jersey and Maryland having both estate tax and inheritance tax. An inheritance tax is normally levied on inheritance received by friends, unmarried partners, and non-immediate family. A deduction or credit is typically given against state estate tax for inheritance tax paid in states with both taxes.

Most Canadians with property in the US will never have to worry about state estate or inheritance tax. Neither Florida, Arizona nor California levies either such tax. In fact, none of the traditional “sunshine” states do except for Hawaii, which has a marginal estate tax maxing out at 16%.

The main issue with state estate tax is that states are not controlled by the Canada US Income Tax Treaty, and therefore typically little to no unified credits are afforded to Canadians who die owning property in the state. Tax rates vary among the states, with many states, like Hawaii and New York, having marginal estate tax rates that top out at 16%.

States with inheritance tax generally offer little in the way of exemption amounts even for US citizens and residents. Some states offer no exemption at all.

Estate tax paid at the state level may be taken as a deduction to reduce the gross estate of an individual for US federal estate tax purposes. This deduction generally reduces, but does not eliminate US estate tax.

In New York the current state estate tax exemption level for US citizens and residents is $1 Million. For non-citizen non-residents New York estate tax may be levied on amounts exceeding the $60,000 threshold. This means that even for US citizens and residents, $4.25 Million in assets may be taxed by New York State before the federal estate tax even kicks in at $5.25 Million.

For example, in the now famous case of Windsor v. United States, Edith Windsor was forced to pay $363,000 in federal estate taxes upon the death of her wife Thea Spyer, and an additional $275,000 in New York estate taxes. Even with the exemption amounts and deduction for state estate taxes paid, Mrs. Windsor paid over $600,000 in total estate taxes from her late-wife’s estate.
Individuals looking to invest in property in the following states should be aware of the tax implications of state estate and inheritance taxes.

Furthermore, same-sex couples should take special precaution in states where same-sex marriage is not yet recognized, as they may not receive a tax-free rollover upon their spouse’s death as is customary for heterosexual married couples.

States with Estate Tax:

  • Maine
  • Vermont
  • New York
  • Massachusetts
  • Rhode Island
  • Connecticut
  • New Jersey
  • Delaware
  • Maryland
  • Illinois
  • Minnesota
  • Washington
  • Oregon
  • Hawaii
  • Washington, D.C.

States with Inheritance Tax:

  • Pennsylvania
  • New Jersey
  • Maryland
  • Tennessee
  • Kentucky
  • Iowa
  • Nebraska

New York State Estate Tax Refund to Same-Sex Couples

Governor Cuomo announced on July 23, 2013, that New York State would be issuing New York estate tax refunds for overpayment that was due to only the non-recognition of a valid same-sex marriage and where the decedent died between 2008 and July 24, 2011. Refunds are expected to be returned with interest.

In order to claim a refund or tax adjustment the surviving spouse must file an amended tax return. Individuals may contact the New York State Taxpayer Information Center at 518-457-5387 for further guidance.

The information contained herein is for informational purposes only, and is not legal advice or a substitute for legal counsel. It is not intended to be attorney advertising or solicitation. If you have a legal question, please consult with a licensed attorney.