Federal estate tax rates range from 18% to 40%, and Maryland imposes a state estate tax that can be as high as 16%. The Old Line State is also one of only six states that has an inheritance tax on its books. Estate taxes are based on the market value of assets like real estate and investment portfolios, but not all estates pay them. That is because both the federal government and Maryland have generous estate tax exemptions.
Estate tax exemptions
The federal government’s estate tax exemption is $12.92 million in 2023. In 2022, the exemption was $12.06 million. The exemption is increased each year based on inflation, which is why the increase for 2023 is so large. In Maryland, the estate tax exemption is $5 million. To avoid double taxation, Maryland allows estate administrators to deduct any federal estate taxes due from the value of the estate.
Inheritance taxes
Inheritance taxes are a thorny estate planning issue. Only six states collect them, and Iowa is in the process of phasing theirs out. Inheritance taxes are paid by heirs rather than the estate, but only certain heirs pay them. In Maryland a decedent’s spouse, children, parents, grandparents, stepparents and siblings do not have to pay inheritance taxes, but all other heirs are taxed at a rate of 10%. Nonexempt heirs who live outside Maryland are still required to pay Maryland taxes on inheritances they receive from Maryland residents.
Avoiding estate taxes
There are a few strategies Maryland residents can use to reduce or avoid estate and inheritance taxes. Trusts are a popular option because they can be used to avoid the probate process as well as reduce estate taxes. Charitable donations and taking advantage of the federal government’s gift tax exemption can also reduce the value of estates and the amount of estate taxes due.