Congress Hammers Final Nail into Coffin of NH’s Estate Tax

Legislation enacted last week to keep the federal government from temporarily going over a “fiscal cliff” didn’t grant a similar stay of execution to New Hampshire’s long-dormant estate tax.

New Hampshire’s estate tax is a “pick-up” tax equal to the state death tax credit previously allowed under federal estate tax law. Estates subject to a “pick-up” tax paid no more in total as a result of such schemes, but merely diverted some of the tax that would have otherwise gone to Uncle Sam to the deceased’s state of last residence.

Since the federal credit for state taxes had been repealed for the period from 2005 through 2012, there was no state tax owed by the estates of any New Hampshire residents who died during those years.

Absent congressional action, the federal tax credit was to be resurrected on January 1st. Along with a package that will result in a wide range of tax increases, Congress also put a permanent nail in the coffin of the state death tax credit. As a result, even though New Hampshire’s estate tax law remains on the books, it will have nothing to tax.

The effective demise of New Hampshire’s estate tax follows by 10 years the termination of the state’s Legacy and Succession Tax. The L&S Tax was an 18% levy imposed on the fair market value of property passing at, or in contemplation of, death to anyone who was not a lineal relative of the deceased.

Federal Estate Tax Rates and Exemptions Made Permanent
While taxes will go up for many people following President Obama’s signing last week of the American Taxpayer Relief Act of 2012 (ATRA), a decision on steep and mandatory cuts to federal spending was deferred until March 1st. In an attempt to force action on the country’s budget deficits, Congress had previously passed legislation coupling the January 1st expiration of tax cuts enacted during George W. Bush’s first term as president – including reductions in federal estate taxes – with across-the-board reductions in discretionary spending programs.

While state “pick-up” taxes are no more, the federal estate tax remains in effect. Immediately prior to the passage of ATRA, the federal estate tax had a top rate of 35% with a $5 million exemption for 2011 that was indexed for inflation from that year forward. The maximum tax rate was set to revert on January 1st to the 55% level in effect before the Bush tax cuts, with only a $1 million exemption. With the recently passed legislation, the maximum estate tax rate is now permanently set at 40%, with a $5 million exemption that is also indexed for inflation.

 

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