Want proof taxes can actually go
down? In the past three years, nine states have eliminated or lowered
their estate taxes, mostly by raising exemptions.
And more reductions are
coming. Minnesota lawmakers recently raised the state’s estate-tax
exemption to $2.1 million retroactive to January, and the exemption will rise
to $2.4 million next year. Maryland will raise its $3 million exemption to $4
million next year. New Jersey’s exemption, which used to rank last at $675,000
a person, rose to $2 million a person this year.
Next year, New Jersey is
scheduled to eliminate its estate tax altogether, joining about a half-dozen
others that have ended their estate taxes over the past decade.
This tax-cutting trend has been
fueled by competition between the states for affluent and wealthy
taxpayers. Such residents owe income taxes every year, but some are willing to
move out of state to avoid death duties that come only once. Since the federal
estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for
inflation, state death duties have stood out.
“States are under pressure to
keep pace with both the federal estate-tax exemption and exemptions in
neighboring states,” says Bruno Graziano, a senior analyst with information
services firm Wolters Kluwer NV.
Two holdouts remain:
Massachusetts and Oregon. These two have estate-tax exemptions of $1 million or
below, compared with nine that did in 2009.
The tax bite is set to increase
in each because neither adjusts its break for inflation.
In Massachusetts, some lawmakers
are worried about losing residents to other states because of its estate
tax, which brought in $400 million last year. They hope to raise the exemption
to half the federal level and perhaps exclude the value of a residence as well.
These measures stand a good
chance of passage even as lawmakers are considering raising income taxes on
millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz LLP in
Needham, Mass., who tracks the issue for the Massachusetts Bar Association.
State officials “are worried about a silent leak of people down to Florida, or
even New Hampshire,” he adds.
The outlook is different in
Oregon, according to Mark McMullen, the state’s chief economist. No efforts to
raise the exemption have gotten traction in the legislature, although
estate-tax revenue of more than $200 million for the two-year cycle
ending June 30 is 50% higher than forecast, helped by strong housing
and financial markets.
“We don’t see a lot of folks
migrating out to avoid the estate tax,” says Mr. McMullen.
While most recent changes have
been to state estate taxes, some states with inheritance taxes are feeling
pressure as well. Six states have these levies, which are payable by the person
who inherits assets rather than the estate of the person who died. States can
have either one of the taxes, or both.
Inheritance tax rates and
exemptions often vary according to the heir’s relation to the decedent. In
Nebraska, for example, there is no tax on assets left to a spouse, a top rate
of 1% on assets left to lineal relatives or siblings, and a top rate of 18% on
assets left to nonrelatives.
Last year, lawmakers changed
Pennsylvania’s inheritance tax, which brought in $962 million for the
fiscal year ended June 30, 2016, so that family farms and businesses are
exempt. The provisions were retroactive to 2012 for farm owners and 2013 for
business owners.
In Kentucky, Gov. Matt Bevin has
called for repeal of the state’s inheritance tax, which has rates up to 16%,
while remaining open to other revenue increases.
Two states, New Jersey and
Maryland, have both estate and inheritance taxes. Although both have scaled
back their estate tax, neither has cut the inheritance tax, according to Mr.
Graziano.
In New Jersey, the inheritance
tax is typically far less important than the estate tax because it exempts
lineal descendants, says Samuel Weiner, an attorney with Cole Schotz PC in
Hackensack, N.J. Although the rate on amounts left to unrelated heirs is as
high as 16%, “People are just happy they’re getting bequests,” he adds. Maryland
has generous exemptions to its inheritance tax as well.
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