We recently published a post that provided information about potential changes to the federal estate tax and the capital gains tax. Here in New York, we also have a state-level estate tax to contend with, and an important threshold has been updated for 2021.
New York Estate Tax Exclusion
The exclusion is the amount that can be transferred before the estate tax would be applied on the remainder. In 2021, the exclusion was $5.85 million, and this year it has gone up to $5.93 million.
This is about half of the $11.7 million federal estate tax exclusion, so you could be exposed to the New York tax even if you are exempt on the federal level. There is a graduated rate in our state that starts at 3.06 percent for the first $500,000, and it maxes out at 16 percent for estates that exceed $10.1 million in value.
There is a peculiar provision in the New York state estate tax law that is called the exclusion “cliff.” If the value of the estate exceeds the exclusion amount by five percent or more, the entirety of the estate would be subject to taxation.
If you own valuable property in a state outside of New York that has an estate tax, that tax would be applicable if its value exceeds the exclusion in that state. This is something to keep in mind, because the exclusion in a state like Massachusetts is just $1 million.
Many people assume that the term “inheritance tax” is just another way of referring to an estate tax. This is understandable, but in reality, these are two different forms of taxation that can enter the picture when an estate is being administered.
As we have touched upon, an estate tax is levied on the portion of an estate that exceeds the amount of the exclusion. The entire estate would be taxed before it is distributed to the heirs, and there would be no further transfer taxes.
An inheritance tax works in a different manner. This tax can be levied on distributions to each individual inheritor.
There is no federal inheritance tax, and there are just six states in the union that have state-level inheritance taxes. Fortunately for us, the Empire State is not one of them.
However, if you inherit property that is located in a state that has an inheritance tax, the tax in that state would be a factor. New Jersey is one of the six states with inheritance taxes, and Pennsylvania is another one.
We should point out the fact that close relatives are typically exempt from inheritance taxes. For example, in New Jersey, spouses, domestic partners, parents, grandparents, children, stepchildren, and grandchildren are completely exempt.
Federal Estate Tax Overview
While we are on the subject, we should provide a brief overview the federal estate tax parameters. As we have stated, the exclusion is $11.7 million, and the maximum rate of the federal tax is 40 percent.
There is an unlimited marital deduction, so you can transfer any amount of property to your spouse free of taxation. One caveat to this statement is the fact that this deduction is only available to American citizens.
You cannot give large gifts to loved ones to avoid the estate tax, because there is a gift tax, and it is unified with the estate tax. The exclusion applies to lifetime gifts and the estate that will be transferred after your passing.
There is no gift tax on the state level, but gifts that you give within three years of your death are considered to be part of your estate for tax purposes.
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If you are exposed to any of these taxes, there are steps you can take to mitigate the damage. We can help you develop a tax efficiency strategy, and of course, we can be of assistance if you do not have any transfer tax concerns.
You can schedule a consultation appointment right now if you call us at 585-374-5210, and you can fill out our contact form if you would prefer to send us a message.
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