John R. Bullis: Hooray for Nevada — no death taxes!
The State of Nevada does not impose or charge any death taxes or inheritance taxes.
We tend to take that benefit for granted. But some states do have a death or estate tax. Connecticut charges 12 percent tax on total Connecticut assets left at death that are greater than $2 million. Massachusetts charges 16 percent death tax on assets greater than $1 million.
Rhode Island death tax is 16 percent on assets greater than $1.5 million. Minnesota charges 16 percent death tax on assets greater than $1.2 million. Some other states also tax assets transferred (left) at death.
A different kind of tax is the inheritance tax. Nevada does not have it, but Iowa charges 15 percent on inheritances greater than $25,000. Pennsylvania charges 15 percent on assets inherited greater than $3,500 with less tax for some beneficiaries. Each state has special rules. Pennsylvania for instance has lower inheritance tax for close relatives and higher inheritance tax for nephews and other relatives.
And it seems many states keep changing their state tax rules. That requires some extra work to be sure the state rules are observed correctly.
The federal rule about “step-up” in tax basis applies in all states (on most assets).
If the original cost of a stock was $1,000 and the fair market value at death was $4,000, the tax basis (cost) to the person inheriting that stock is $4,000. The $3,000 increase in value is not taxed to anyone. The person that inherited that stock can sell it for $4,500 and will only have a $500 long term capital gain to be reported and taxed.
Since Nevada is one of the eight community property states, even better tax basis rules apply. In a community property state like Nevada, if the husband dies first, the surviving spouse gets a “step-up” in tax basis of community property assets to the fair market value at husband’s death-for his half and for her half interest. That saves a lot of federal income tax for the survivor.
For example, suppose the couple purchased a rental house many years ago. They have been claiming depreciation expense on the building and other tangible assets (appliances, etc.) and their tax basis is reduced by the depreciation expense. Then when the husband dies, the wife gets a new tax basis-fair market value at date of his death. She then starts a new depreciation schedule and claims depreciation expense on the new value. That way the rental is going to show much less income for the survivor after the increased depreciation expense.
That “step-up” in tax basis does not apply to IRA accounts, retirement accounts or annuities. The person inheriting a regular IRA account “steps into the shoes” of the person that died. When distributions are received, taxable income is recognized.
Fortunately, since Nevada does not have an income tax (and will not have one in the foreseeable future).
Did you hear? “Enthusiasm is life.” — Paul Scofield.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.