November 24, 2024
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PERSONAL FINANCE TAX TIMES

2024 State Inheritance Tax Update: How Much Will Your Family Owe? Find Out Now!

2024 State Inheritance Tax Update: How Much Will Your Family Owe? Find Out Now!

High estate and inheritance taxes hinder economic growth and incentivize wealthy individuals to relocate, impacting state revenue. These taxes also lead to inefficient estate planning strategies and tax avoidance methods that do not benefit anyone.

Under the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption was significantly increased to $11.18 million per person, with further adjustments scheduled until 2025. Only Connecticut has aligned its state estate tax exemption with the federal threshold. Meanwhile, New York boasts the second-highest exemption but levies a high-rate estate tax, differing from most states.

Six states administer an inheritance tax, with New Jersey and Kentucky imposing the highest marginal rates at 16 percent. Iowa, however, is phasing out its inheritance tax, reducing rates for inheritances between $12,500 and $150,000. The elimination of estate taxes in multiple states post-federal law changes in the 2000s underscores the adverse effects of these taxes on the economy and the state’s competitiveness.

Recent changes in 2024 include Iowa’s reduction of inheritance tax rates, New York’s increased exemption threshold, Maine’s exemption threshold boost, and Connecticut’s alignment with the federal exemption. These changes reflect states’ efforts to mitigate the negative impact of estate and inheritance taxes on economic growth and taxation avoidance.

Most states have moved away from estate and inheritance taxes or raised their exemption levels after the federal government phased out the state estate tax credit in 2005. Delaware and New Jersey fully repealed their estate tax, and Vermont and Maine substantially increased their exemption thresholds. States like Hawaii and Illinois made unsuccessful attempts at elimination or reform in 2024.

States like Kentucky, Maryland, New Jersey, and Pennsylvania have a varying rate structure based on the proximity of bequest recipients to the decedent. This proximity test implies preferential treatment for immediate family members, while others face higher rates. The 12 states imposing estate taxes need to consider phasing them out to promote generational wealth transfers, reduce economic burdens, and prevent government overreach during a difficult time for individuals dealing with the loss of a loved one.

It is crucial for states to align their estate and inheritance tax policies with federal standards to foster economic growth, discourage tax avoidance strategies, and maintain a competitive advantage. By gradually eliminating these burdensome taxes, states can ensure stability for family businesses, reduce transaction costs, and alleviate the financial strain on affected taxpayers.

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