Favorable New York Estate Tax Laws on the Horizon?

New York State, known as one of the heavier tax-imposers in the country particularly when it comes to estate tax, may soon be more appealing to retirees. New York may be following on the heels of the federal government’s revamped estate tax codes, which raised exemption amounts to levels that effectively omitted the vast majority of individuals and families from an Uncle Sam estate tax hit. The New York State Tax Relief Commission issued a December 2013 report that proposes changes in 2014 to lower the highest estate tax rate and raise the exemption amount to the same levels as that imposed by the federal government.

The Potential for Major Estate Tax Relief

The federal government and seventeen states impose taxes on estates upon the death of the individual. Each exempts a certain amount of an estate’s net worth from these taxes, although these amounts differ state to state. Thanks to the passage of the American Taxpayer Relief Act of 2012, starting in 2013 the federal government began operating under new rules for estate taxes that significantly increased the exemption amount and provided that this value would be indexed each year for inflation.

Currently, New York exempts $1 million for estate taxpayers, and assesses a top tax rate of 16% on amounts above that threshold. New York’s current exemption level is one of the lowest of the states that employ some type of death tax (either estate tax, inheritance tax, or both). If the Commission’s proposal were to become law, however, this exemption would rise to that of the federal level, which right now is $5.25 million, and would be indexed each year for inflation just like the federal exemption. Additionally, the top tax rate on any amount above the exemption threshold would decrease to 10%.

Any individual decedent’s estate with a net worth at or less than the exemption level would therefore be exempt under both federal law as well as New York law if this proposal were to come to fruition. This would undoubtedly sway many more New Yorkers to remain in the state since nearly 90% of all estates would be exempt from any estate tax. As indicated in the Commission’s report, middle-income New Yorkers would benefit greatly because until now, the exemption levels have failed to increase along with the growth in home values. While the state treasury itself would lose out on significant revenue, this money would be left with consumers to put back into the economy.

This is all of course contingent on the proposal becoming law. It is also unclear whether the new rates will commence in 2014, 2015, or later, and whether one set rate will be implemented immediately or phased in over time. New Yorkers should keep a keen eye on the progress of this proposal as it will no doubt influence their estate planning, including the decision of whether to remain in New York or head for greener pastures such as Florida or North Carolina, which now have no estate taxes.