You’ve probably heard of the estate tax, and are aware it is a federal tax. But what many people may not know is that Illinois is one of only a few states that also impose a state estate tax. While a legal or tax professional should help you understand your potential estate tax obligations, there are some basics that will help you in understanding your estate tax bill.
The most important thing to know is that if your estate is valued at under $4 million, you won’t have any state estate tax to pay. This is a lot, but much less than the roughly $11 million limits that trigger the federal estate tax — so for a lot of people, they will pay state, but not federal estate tax (although the federal estate tax rate does change, very often).
Unfortunately, the calculation of the Illinois estate tax is so complex that it actually requires algebra, because it is based on the state’s death tax credit, which was based on a federal law that has since been phased out and is no longer used.
Yes, it’s confusing, which is why thankfully, the state of Illinois has created a handy chart for people to calculate their estate taxes. But, if you need help, an Illinois estate tax attorney at Orlowsky & Wilson, Ltd can provide assistance.
Like most taxes that are incremental, such as federal income taxes, a different tax rate applies to certain parts of the overall value of the estate. This results in differing effective tax rates.
Let’s look at an example. As we said, you won’t pay any Illinois estate taxes on $4 mill. But at $5 million, you would be paying close to $300,000 in estate taxes to the State of Illinois. When the math is done, if your estate is valued at about $5 million, this creates an effective tax rate of close to 29%. But the calculated tax rate when going from $4 million to $5 million would be much less — it can go to as low as just over 10 percent.
In other words, people just over the $4 million threshold may not pay more tax dollar-wise, but on a percentage basis, they will pay at a higher tax rate than someone would if taxes were assessed at, for example, $9 million.
You can do things to help your tax position. For example, the taxes are based on the value of your assets on the date of death — not on what you purchased them for, and not on what their ultimate sale price may be some time in the future.
Additionally, like other taxes, certain things, like debts, estate administration expenses, or some business operating expenses, can be used to deduct your tax burden. You can also give assets to a surviving spouse or put assets into a trust, and they will not be calculated as part of your total assets.
You also can gift property away, but you’ll need to start early — you can only gift up to $14,000 in gifts per person, per year.
The estate tax exemption threshold in Illinois is $4 million. This means that estates valued at over $4 million are subject to Illinois estate tax.
The Illinois estate tax is calculated using an interrelated calculation. The estate representative must submit Illinois Form 700 along with IRS Form 706, including all schedules, appraisals, wills, trusts, and attachments. The tax is determined based on the estate’s gross value exceeding the $4 million threshold.
Yes, non-residents who own property in Illinois may be subject to Illinois estate tax on the value of the property located in the state.
The Illinois Estate and Generation-Skipping Transfer Tax Return (Form 700) is due within nine months of the decedent’s death. An extension can be requested by filing Form 700-EXT.
Yes, deductions can be applied to the estate tax calculation, including debts, funeral expenses, and administrative expenses.
Effective estate planning can help minimize Illinois estate tax liability through strategies such as gifting, trusts, and life insurance policies.
The Illinois Attorney General’s website provides a calculator to help estimate the estate tax liability. Additionally, the estate representative can refer to the Instruction Fact Sheet and Form 700 for detailed guidance.
Contact our Lincolnshire estate planning attorneys at Orlowsky & Wilson, Ltd at (847) 325-5559 can help you create an estate plan that is safe and minimizes your tax burden as much as possible.
(Updated 11/18/2024)
