Some states are expensive to live in and some are expensive to die in. But before you get too sad about it, most of you probably won’t owe any death taxes.
However, some of you will. It depends on where you live and how much you have in assets.
What are Death Taxes?
The death tax isn’t technically a real tax. It is a filler word we use to mean either Estate Taxes or Inheritance Taxes.
- Estate Taxes: This tax is paid by your estate before it gets to your beneficiaries.
- Inheritance Taxes: This tax is paid by your beneficiaries once they’ve received their inheritance.
The difference between these two taxes is when/how they get paid but they both have the same net result which is that your heirs get less.
Only six states have Inheritance Tax and they are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Note: Inheritance tax usually applies in the state where the decedent lived or where their property was located regardless of where the beneficiary lives. But the good news is that spouses and kids are generally exempt from inheritance tax.
13 states have Estate Taxes which I talk about more below.
State or Federal? Yep, there’s Two
There is an Estate Tax on the federal level but it only applies to estates that are larger than $12.92 million for individuals and $25.84 million for couples in 2023, so most people don’t have to worry about Federal Estate Tax, but if you happen to have more than 13 million dollars then congrats!
State Estate Tax
13 states have an estate tax, but just like on the federal level, they have a minimum estate value before anyone owes an estate tax. In other words, you won’t owe state estate taxes until your estate is over the exemption amount.
Here are the states that have an estate tax with their exemption amount in 2023:
- Connecticut – $12,920,000
- District of Columbia – $4,594,000
- Hawaii – $5,490,000
- Illinois – $4,000,000
- Maine – $6,410,000
- Maryland – $5,000,000
- Massachusetts – $1,000,000
- Minnesota – $3,000,000
- New York – $6,580,000
- Oregon – $1,000,000
- Rhode Island – $1,733,264
- Vermont – $5,000,000
- Washington – $2,193,000
Note: you might have noticed that one state has both an estate tax and inheritance tax: Maryland.
But What About the Other Taxes?
Because relatively few states have death taxes and few people die with very large estates, most people don’t need to worry about death taxes. But the type of taxes that most people need to worry about when inheriting/bequeathing money is normal income taxes!
For example, if you leave your traditional TSP to your kids, then they will have to pay taxes on that money because that money is pre-tax. The type of income taxes that a beneficiary will have to pay will depend on what type of account/asset they are receiving.
Note: Not all assets require the beneficiary to pay taxes. For example, a Roth IRA or Roth TSP!
Before the Rules Change
This article was based on how things work in 2023, but death taxes are the sort of thing that can change drastically over time. States (and the Fed) have been known to increase/decrease the estate tax exemption amount significantly in the past, so if your state has death taxes, you’ll want to look up the specifics to understand how the rules will apply (or not apply) to you.