New York is a great place to live for a multitude of different reasons, but there is a significant tax burden. From an inheritance planning perspective, there is a state level estate tax in our state.
In this post, we will share some important details about the New York estate tax, and we will also give you a brief overview of the federal transfer taxes that can impact high net worth individuals.
New York Estate Tax Parameters
The exclusion is the amount that can be transferred before the estate tax would be applied on the remainder before it is transferred to the heirs. In 2020, the New York state estate tax exclusion is $5.85 million.
There is a graduated rate that starts at 3.06 percent for the first $500,000, and it goes up to 16 percent. If you are leaving an inheritance to your spouse, the estate tax is not applicable at all.
There is no gift tax in New York, so you can give gifts to reduce the value of your estate to mitigate your exposure. However, there is a three-year clawback provision. Large gifts given within three years of your death would be added to the taxable value of your estate.
We have another stipulation here in New York that is unique in a not so good way. If the value of your estate exceeds the exclusion amount by 5 percent or more, you would fall off the so-called “cliff.”
Under those circumstances, the entirety of your estate would be subject to the estate tax. You would not be able to use the $5.85 million exclusion.
Including New York, there are a total of 12 states that have state-level estate taxes. If you own property in one of the 11 other states, and its value exceeds the estate tax exclusion in that state, the tax would apply.
The exclusions are different in each state, so this is something you should keep in mind. For example, the state level exclusion in Massachusetts is just $1 million.
Federal Estate Tax
On the federal level, the exclusion is $11.58 million, so your estate could be exposed on the state level and exempt from the federal estate tax. The maximum rate of the federal tax is 40 percent, and this is certainly an eye-catching figure.
The ability to transfer assets to your spouse tax-free is in place on the federal level as well. A surviving spouse could use the exclusion that was allotted to their deceased spouse, so they would have two exclusions to utilize. This is called “portability” in estate planning circles.
There is a federal gift tax that is unified with the estate tax, so the amount of your available exclusion would be reduced by large tax-free gifts that you give while you are alive.
However, aside from the unified federal gift and estate tax exclusion, there is an annual gift tax exclusion. You can give as much as $15,000 to any number of recipients in a calendar year free of taxation.
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