What Is State Inheritance or Estate Tax?
2 of 7 in Series: The Essentials of Taxes for Estates and Trusts
The rules for state inheritance and estate taxes vary based on the state. Check with the tax department of the decedent’s state for that state’s inheritance and estate tax requirements.
State inheritance and estate taxes are not deductible on the estate income tax returns.
Just as many states impose an income tax (like the federal income tax), many also impose estate or inheritance taxes. Most states used to calculate these taxes based on a credit on the federal Form 706.
However, as the credit for state estate taxes paid was whittled away on Form 706, most states stepped up to the plate and pegged their portion of the tax to what it would’ve been based on a prior year’s calculation.
For example, Vermont calculates its estate tax based on federal estate tax rules in effect on January 1, 2001, whereas Kansas computes its tax by using federal laws that went into effect in 1997.
You need to check with your state’s tax department to get the rules in effect at the time of your decedent’s (deceased person’s) death. And, if you’re faced with an estate that owns property in more than one state, you may want to consult a competent tax professional because the estate may owe estate or inheritances taxes in each of those states.