While many commentators saw the mid-term elections as an opportunity to focus on whether the Senate would remain blue and the House would turn red, they ignored other important aspects of the mid-term elections. According to Ballotpedia, voters in 37 states considered more than just who would take office. Folks cast ballots for a wide range of issues, such as approving the issuance of bonds for the development of low-income housing, raising the minimum wage, and increasing taxes. You might think that with the continued rise of inflation, voters would oppose any measure that might increase their taxes, but as we will discover, that’s not always the case.
Perhaps unsurprisingly, Massachusetts, a state that has one of the highest individual income tax collections per capita ($2,477) passed a measure that would amend their state constitution by establishing an additional 4% state income tax on annual taxable income of more than $1 million, adjusted annually for inflation. Massachusetts imposes a state income tax and taxes on both long and short-term capital gains. Massachusetts also imposes a state estate tax on estates that exceed $1 million. New York is the only state with a higher individual income tax collection amount per capita ($2,656). New York also taxes individual income and capital gains and imposes a state estate tax; however, it imposes a state estate tax on estates exceeding $6.1 million. According to Charles Schwab, Connecticut, California, and Oregon round out the top-five states with the highest individual income tax collections per capita at $2,268, $2,135, and $2,038, respectively. Connecticut also imposes a state estate tax on estates exceeding $9.1 million and Oregon imposes a state estate tax on estates exceeding $1 million. Oregon, along with Missouri and Montana, allows residents to deduct a portion of federal taxes paid from state tax liability. Alabama, Iowa, and Louisiana allow a full deduction of amounts paid at the federal level.
California voters also had the opportunity to decide whether they wanted to impose additional taxes on personal income, ultimately voting against the measure to add 1.75% tax rate on income exceeding $2 million. While California does not impose a state estate tax, it imposes an income tax and tax on capital gains at the same rate. Alabama, Arizona, Arkansas, Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, and Wisconsin in addition to California, Connecticut, Massachusetts, New York, and Oregon all tax capital gains and individual income at graduated tax rates beginning at the low end of .25% in Oklahoma and topping out at the high end of 14.63% in California.
As most everyone knows, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming levy no personal income taxes or taxes on capital gains at the state level. While New Hampshire does not tax income from wages, it does impose taxes on dividend and interest income. Finally, Washington doesn’t impose taxes on personal income or capital gains, but in 2021 a bill passed that would have imposed tax on long-term capital gains above $250,000 beginning in 2022. It was struck down in March 2022 and Washington State has appealed the ruling to the Washington Supreme Court. A hearing date is pending.
Six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Of those, Maryland has the distinction of being the sole state in the nation that imposes an estate tax in addition to the inheritance tax. Hawaii, Illinois, Maine, Minnesota, Rhode Island, Vermont, and Washington join Connecticut, Maryland, Massachusetts, New York, and Oregon in imposing an estate tax. The amounts on which they impose the tax vary greatly. As noted above, Massachusetts imposes a tax on an estate with assets exceeding $1 million as does Oregon. Rhode Island levies tax on estates with assets exceeding $1.65 million, Washington $2.2 million, Minnesota $3 million, Illinois $4 million, Vermont $5 million, Hawaii $5.5 million, and Maine $6.01 million. The rates at which each state imposes tax range from .08% in Rhode Island to 20% in Washington, with many of the other states topping out at 16%.
Estate planning often focuses on taxes at the federal level and advanced estate planning focuses on techniques designed to freeze the value of assets or reduce the value for estate tax purposes. As this article demonstrates, that’s only part of the total tax picture. For those desiring to lower their overall tax burden, it’s important to understand the impact that the taxes imposed by the individual’s state of residence and how, if at all, to reduce that burden as well as the interplay with taxes at the federal level. Estate Planning is complex and requires an expert in these matters to advise clients properly.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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