Our clients in Connecticut have tax questions. We know that Connecticut is a high taxing state, so we try to advise as best as possible.
But one tax question is often missed: does Connecticut have an estate tax?
In this article, we will answer that question and also examine inheritance and gift tax. Let’s dive in.
Table of contents
Connecticut Estate Tax
Unfortunately, Connecticut is one of 12 states in the country that does impose an estate tax. It is a progressive tax with rates that start at 7.8% and go as high as 12%.
However, Connecticut does have an estate tax exemption. It is $5.1 million. So if your estate is less than this amount you do not have to file an estate tax return and you do not owe any tax. Connecticut does cap the total estate tax liability at $15 million.
What about Connecticut inheritance tax?
Connecticut does not impose an inheritance tax. This is actually not as rare as you might think. Only seven states levy an estate tax against its citizens.
Connecticut gift tax
Connecticut is actually the only state in the country that has a gift tax. The gift tax exemption though is adjusted so that it matches the federal exemption of $11.7 million for 2021.
Does Connecticut have portability?
Unfortunately, Connecticut does not have portability laws. So with a married couple, when one spouse passes away they are unable to transfer any remaining exemption to the other spouse. So the other spouse will be assessed tax based on only the one exemption.
So what about the federal estate tax rules?
The estate tax is commonly referred to as the death tax. These terms are used interchangeably, while the death tax is not the technical term.
The tax has been around for decades, but has come under great discussion as of late. There are many people in the federal government and even state politicians that are discussing raising the rates as well as decreasing the exemption amount.
So let’s discuss how you calculate it. When someone passes away, an estate is created. An executor is in charge of managing the estate and hiring professionals to make sure it is compliant and any tax due is paid.
The first step is to schedule out all of the assets. This includes investment accounts, real estate, businesses owned, and retirement accounts. You should also consider life insurance proceeds as these are generally not taxable to the beneficiary, but taxable to the estate.
The next step in the process is to deduct from gross assets any estate liabilities or mortgages and also any administrative fees. These administrative fees would include CPA costs for tax preparation, estate attorney fees, and any professional fees like appraisal costs.
Now that net assets have been determined, you just compare this amount to the federal exemption. Any amount that exceeds the exemption would be assessed an estate tax at a rate of 40%.
Overall Connecticut tax structure
Connecticut is not known as being one of the more tax friendly states. It generally has high real estate taxes, income taxes, and of course now you know that it has an estate and inheritance tax.
But even though it is a high tax state, it doesn’t mean that you don’t have options. You should start your tax planning as early as possible. In fact, if you assume that a decade down the road your estate may hit the estate tax threshold you may want to start now.