Lesson 42: Differences Between State and Federal Estate Taxes

In this lesson, we will explore the key differences between state and federal estate taxes. Understanding these differences is crucial for effective estate planning and ensuring compliance with all applicable laws. For additional context, you may want to review our Overview of Federal Estate Tax Law.

Federal Estate Tax

The federal estate tax is imposed on the transfer of the taxable estate of a deceased person. The tax is levied by the federal government and is based on the value of the decedent's gross estate after certain deductions and exclusions.

Tax Rate Taxable Estate Bracket
18% - 40% Over $12.06 million (2022)

State Estate Tax

Many states impose their own estate taxes, which can differ significantly from the federal estate tax. These state taxes vary in terms of exemption amounts, tax rates, and rules. For state-specific details, refer to our State-Specific Estate Tax Laws lesson.

Note: Some states impose both estate and inheritance taxes. It's important to understand the distinction.

Key Differences

  • Tax Rates and Exemptions: Federal estate tax rates range from 18% to 40%, whereas state tax rates can vary widely. Each state also sets its own exemption thresholds.
  • Tax Forms: Different states require different forms and filings. Federal estate tax requires IRS Form 706.
  • Portability: The federal estate tax allows for portability of the deceased spouse's unused exclusion amount, while most states do not.

Visual Representation


        graph TD
            A["Federal Estate Tax"] -->|"Taxed by"| B["Federal Government"]
            A -->|"Exemption"| C["$12.06 million (2022)"]
            A -->|"Tax Rates"| D["18% - 40%"]
            E["State Estate Tax"] -->|"Taxed by"| F["Individual States"]
            E -->|"Varies by State"| G["Exemption Amounts"]
            E -->|"Varies by State"| H["Tax Rates"]

Comparison Table

Aspect Federal Estate Tax State Estate Tax
Taxing Authority Federal Government Individual State Governments
Exemption Amount $12.06 million (2022) Varies by State
Tax Rates 18% - 40% Varies by State
Portability Yes Varies by State
Required Form IRS Form 706 Varies by State

Conclusion

Understanding the differences between state and federal estate taxes is essential for effective estate planning. Each state has its own rules and regulations, so it is important to stay informed and seek professional advice when necessary. For more comprehensive insights, consider exploring the Overview of Federal Estate Tax Law and other related lessons.

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