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State Death Taxes Hinge On Political Winds in Orange County, CA

6a017d3e6b2617970c019aff189d6f970b-320wi.jpgWashington finally declared a truce on the death tax this year, with estates now [federally] taxed at 40% with an exemption of $5 million ... Now the death-tax debate has shifted to state capitals, with mixed results depending on which party runs the state.

The federal estate tax is all but dead for most Americans. With its inflation-adjusted exemption at $5.25 million per taxpayer for a combined $10.5 million for married taxpayers, for now anyway, the American Taxpayer Relief Act of 2012 has slain the beast.

But what about "state" estate taxes?

A recent Wall Street Journal editorial, titled "The Die Harder States," reviews the current state of the estate tax - both at the federal and state levels - as well as the current state of our problems with it.

The state level estate tax is not a problem for most states in the union. Nevertheless, it is a problem worth understanding. This is certainly true if your retirement plans might involve one of those states where the estate tax still has teeth.

As noted in the editorial, 18 states (made 19 by the District of Columbia) exact some form of estate tax, sometimes in conjunction with their own form on inheritance and/or gift tax. Each jurisdiction does so to various degrees. Most of the taxing states apply their estate tax as under the former federal estate tax.

Given that the federal tax has been tamed as of late, the state estate taxes pose a potential trap for unwitting estate planners.

Granted, you may still "vote with your feet" when it comes to state laws. Accordingly, if you are looking to cut your overall estate taxation, then evaluate the laws of your state of residency and those of any potential states to which you may relocate in the future.

When state "shopping" for tax avoidance, remember the three rules every realtor knows: location, location, location.

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