New York state has long been a gift tax haven, but recent changes to legislation have reduced the burden of the estate tax as well.
By doubling the estate tax exemption from $1 million to over $2 million, New York has positioned itself as one of the most gift and estate tax friendly states in the U.S.
The gift tax exemption
Even though New York state does not have a gift tax, the taxable exemptions for gifts have decreased. According to the new tax laws, lifetime and death bed gifts given within 3 years of death are now included in the estate tax. However, in response to the inclusion of gifts into estate taxes, New York legislators approved a “cliff” tax where an estate is only taxed if its amount exceeds 105 percent of the state exclusion amount. Therefore, for a $1 million estate, there is now a $420,800 tax exemption, making this the highest statutory exclusion amount in the state’s history. In fact, according to estate tax attorney, Bernard Krooks, this new cliff tax is more tax friendly than ever.
“The bottom line: if you live in New York, don’t own property in a state that imposes a gift tax and are worth less than about $5 million,” he said. “You are simply going to be unable to pay a gift tax over your entire life, no matter how hard you try.”
The benefits of the new laws certainly outweigh the burdens, but the only drawback to the tax exclusion is that assets with potential to generate future income are subject to the federal gift tax.
Benefits of the new tax exemption
New York legislators also removed the generation-skipping transfer tax, making this a significant tax advantage for spouses and family of non-citizens. This benefit extends to gifts for two or more generations below the sender, thereby excluding residents from paying the previous 16 percent tax rate.
Furthermore, this new benefit eliminated the need for a domestic trust fund in the event that a non-citizen does not file a federal tax return. Ultimately, this means that certain residents of New York state can avoid paying estate taxes altogether.
The significance of the law
The gift and estate tax exemption will remove the divide between the state and federal estate exclusion amounts. Since April 1st, 2014, the exclusion rate was set to increase by over $1 million per year until January 1st, 2019. This progression began at $2.062 million and will end at $5.25 million in 2017 before matching the federal tax exemption amount the following year. What this means for state taxpayers is that gifts can now be converted into charitable donations that encompass education and medical expenses, insurance and tax payments, and home purchases for other people.