While many believe estate taxes only hamper the financial activity of very wealthy people, the truth is even middle class individuals can be subject to the burdens of state and federal estate taxes. For example, if you spent your whole life building a small business, the value of that asset can exceed the estate tax threshold easily by virtue of the real estate’s value alone.
For many years, New York’s estate tax lagged behind the federal threshold. Currently, the federal estate tax threshold is $5.49 million while New York’s state exemption is $5.25 million. New York’s inheritance tax exemption will continue to climb until 2019, at which point the amount will match whatever the federal threshold becomes. The change came about thanks to legislation signed by Gov. Andrew Cuomo in March 2014.
One key difference between New York and federal tax laws relates to what is commonly called the “tax cliff.” Under federal and many other state taxation laws, only the amount of the estate exceeding the tax threshold would be subject to tax. For example, if an individual left behind an estate worth $6 million, only the $501,000 exceeding the threshold would be subject to federal income tax.
New York, by contrast, will tax the entirety of the estate if the value exceeds 105 percent of the state inheritance tax threshold. Fortunately, New York taxes inheritances has a far lesser rate than the federal government. Federal inheritance tax currently sits at 40 percent and New York’s will rise to 16 percent by 2019.
New York residents with estates exceeding the inheritance tax threshold will need the executor of their estates to file tax returns. However, once deductions are taken into consideration, the estate may ultimately avoid taxation. Executors will need to take into account such assets as:
- Bank accounts
- Real estate
- Life insurance policies not transferred to individuals through an irrevocable trust
- Value of small businesses
Estate assets given to spouses are not subject to state and federal income tax, so naming a spouse as a beneficiary to high value assets in a will can be one way to lessen the tax burden on the next of kin. Furthermore, certain types of trust can be created to shield certain assets from taxation but the laws are very specific on what types of assets may be guarded by these methods.
New York inheritance tax returns must be filed within nine-months of the deceased’s passing, using Form ET-706 and must include federal Form 706. Executors may request extensions to file by filing and and mailing Form ET-133. Other types of information executors should include are:
- Copy of the death certificate
- Copy of the decedent’s will and/or relevant trusts
- Copies of appraisals
- Letters of appointment for executors or administrators
- Copies of relevant documents regarding litigation involving the estate
- Documentation of any unusual items shown on the return