Depending upon the state in which you live, in addition to the possibility of having to pay federal taxes on your inheritance, you may have to pay an estate tax to the state government, and if you live in one of a handful of states, you may also owe a state inheritance tax. Some states simply enforce the same rates as the federal government, while others have separate tax rates. There are also some states with no inheritance taxes at all and others that exempt first-level relatives like spouses, children and siblings.
States with Inheritance Taxes
States with inheritance taxes will tax you, no matter how much of your inheritance is exempted at the federal level. You will be required to pay from 10 to 16 percent of the value of your inheritance. As of 2011, residents of the following states have to pay inheritance taxes, in addition to federal inheritance taxes and state estate taxes:
- New Jersey
States with Estate Taxes Pinned to Federal Estate Guidelines
Most states apply the same guidelines as the IRS, so if the limits change at the federal level, they change for that state's code as well. Since the federal government excludes most taxpayers from having to pay any kind of estate or gift taxes, people who live in these states typically will not endure any additional burden unless they fall within the wealthiest bracket.
States without Inheritance or Estate Tax
Although there are several states without income taxes, they still require a form of death tax. In fact, there are several states that do not have income tax withholdings taken from earnings of the residents of their states:
- South Dakota
Most states relied on a tax that was specifically allotted through an IRS offset credit. However, that credit was phased out in 2005. Since then, many states have enacted additional legislation preserving their tax. Some states have increased their tax levy and many states are considering additional changes.
Best and Worst Tax States
The death tax is not the only tax you should consider when determining where you should retire. The overall tax burden should be closely considered, including income taxes, property taxes, sales tax, and other taxes. When all things are considered, the states with the lowest overall burden are:
- New Hampshire
While the states with the highest overall tax burden include:
- New York
- Rhode Island
For many Americans, the property will be passed on to a spouse or child. Most states protect those relationships and provide for tax advantages. Keep in mind that a good tax attorney can help you sort through the tax laws for your area. Interview and research a few attorneys before choosing one.