Where not to die in 2012
Changes in estate and inheritance taxes at the state level will make it better -- or worse -- for families in the year ahead.
Updated Jan. 23, 2012, 5:05 p.m. ET
This post comes from Ashlea Ebeling at partner siteForbes.com.
As of Jan. 1, the federal estate tax exemption was indexed for the first time, so that for 2012, up to $5.12 million of an estate will be exempt from the current 35% federal estate tax. That's up from $5 million in 2011, meaning an individual could have left $120,000 more tax-free if he'd died on Jan. 1, 2012, instead of on Dec. 31, 2011.
Meanwhile, separate state levies are still a big concern for families. And there are changes for 2012 on the state levies on dying -- for better and for worse.
Washington, D.C., and 22 states impose estate and/or inheritance taxes. States with estate taxes typically exempt $1 million or less per estate from their tax and impose a top rate of 16%. Six states levy only an inheritance tax, with the rate depending on the relationship of the heir to the deceased and the taxes kicking in, in some cases, on the first dollar of bequest.
Two states, Maryland and New Jersey, impose both. Maryland, for example, imposes an estate tax of up to 16% above a $1 million exemption and a 10% inheritance tax on every dollar left to a niece, nephew, friend or partner, but no inheritance tax on money left to children, grandchildren, parents or siblings. (Any estate tax owed is reduced by the inheritance tax paid.) As in the federal system, bequests to a spouse are tax-free. (Post continues below.)
Some state changes are simply to keep up with inflation. North Carolina's exemption ticked up to $5.12 million for 2012 in keeping with the federal exemption, and Rhode Island's exemption went from $859,350 in 2011 to $892,865 in 2012. But other states are making major changes to the amounts they exempt from tax. In Illinois, which brought back its estate tax in 2011 with a $2 million exemption, the exemption went up to $3.5 million as of Jan. 1, and then will rise to $4 million as of Jan. 1, 2013.
Other changes made in 2011 -- both greedy and generous -- will just carry on, unless of course the state pols decide to fiddle again. Connecticut lowered the amount it exempts from its tax from $3.5 million to $2 million per estate, retroactive to Jan. 1, 2011. Vermont, which had a $2 million exemption in 2010, set its exemption at $2.75 million for 2011 and beyond. Oregon made a technical taxpayer-friendly tweak: Its tax applies to the amount of the estate over $1 million now instead of applying to the full amount of the estate.
Some changes will be prospective. Republican Gov. John Kasich signed a law in 2011 to abolish Ohio's estate tax effective Jan. 1, 2013 (it kicked in at $338,333 through year-end 2012). That will make New Jersey the state with the lowest state estate tax exemption of $675,000. Maine revamped its tax. Its estate tax exemption will rise from $1 million per person to $2 million on Jan. 1, 2013, with lower graduated rates starting at 8% and going up to 12% on amounts of more than $8 million.
According to the American Family Business Institute, which advocates against estate taxes at the federal and state levels, efforts are under way in Indiana, Nebraska, Oregon and Tennessee to repeal the state levies. In Pennsylvania, the House of Representatives recently passed a carve-out to exempt farmers from the state's inheritance tax.
But don't rule out more changes to grab estate tax revenue during the 2012 state legislative sessions. "Most of the states are still in pretty poor shape, and if the economy doesn't improve, you might see more action by state legislatures seeking other sources of revenue," says James Walschlager, an analyst with tax publisher CCH.
Click here for an interactive map showing state estate and inheritance taxes for 2012. Hover over each state to see the dollar amount exempt from taxes and the top rates for 2012.
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