Vermont is a great place to live in many ways, but there are those that want to head to warmer climates during their retirement years. This is understandable, but you should definitely consider the tax situation in your preferred retirement location.
State-Level Estate Taxes
The federal estate tax can shave down the value of your estate by 40 percent of its taxable value, but your estate is probably not exposed to it. There is a credit or exclusion that allows you to transfer a certain amount tax-free before the estate tax is levied on the remainder.
An $11.18 million exclusion was established when the Tax Cuts and Jobs Act was enacted at the end of 2017. It has been indexed for inflation since then, and in 2021, the exclusion stands at $11.7 million.
Prior to the enactment of this measure, the exclusion was $5.49 million, and it will return to that level on January 1, 2026, if there are no legislative changes in the meantime.
There is an unlimited marital deduction, so you can transfer any amount of property to your spouse free of the federal estate tax. The exclusion is portable, so a surviving spouse can use their deceased spouse’s exclusion.
You would naturally consider lifetime gift giving as a response to the estate tax, but this is not the solution because there is also the federal gift tax that is unified with the estate tax.
In addition to the federal estate tax, there are a dozen states that have state-level estate taxes, and you should keep this in mind when you are choosing a retirement location. Vermont is one of these states, and the exclusion in 2021 is $5 million.
With this in mind, if the value of your estate exceeds this amount, your family would benefit if you retire in a state that does not have an estate tax. These are the other states that have their own estate taxes:
- Illinois
- Hawaii
- New Hampshire
- Massachusetts
- New York
- Maryland
- Connecticut
- Oregon
- Maine
- Washington
- Rhode Island
- Minnesota
The District of Columbia also has its own separate estate tax.
If you own property in a state that has an estate tax, it would apply to you, even if you do not live in the state. Of course, this would only be a factor of its value exceeds the exclusion in that state.
There are states with exclusions that are significantly lower than the Vermont state level exclusion. Massachusetts has an estate tax with a $1 million exclusion, and this is the exclusion in Oregon as well.
Inheritance Taxes
Five states have inheritance taxes, but there is no federal inheritance tax. This is a tax that can be levied on distributions to each individual nonexempt inheritor. These five states are New Jersey, Kentucky, Maryland, Pennsylvania, and Nebraska.
State Income Taxes
There are nine states that do not have their own income taxes, so pensions and retirement account distributions are not taxed on the state level. Pennsylvania, Mississippi, and Illinois have income taxes, but they do not tax pension, IRA, and 401(k) income.
Pensions are not taxed in Hawaii and Alabama, but they do tax retirement account distributions.
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Our doors are open if you are ready to work with an Essex Junction, Vermont estate planning attorney to develop a plan for aging. You can send us a message to set up a consultation appointment, and we can be reached by phone at 802-879-7133.
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