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The Federal estate tax used to allow a credit for state death taxes. The Illinois estate tax was the amount of the credit allowed under Federal law. Under this scheme the total Illinois and Federal tax was the same as the total Federal tax before the credit.

The Federal law has been changed and the credit for the state death taxes is being phased out beginning in 2002. Because of this, as of January 1, 2003 Illinois has a new estate tax law. This provides that the Illinois estate tax is the amount that would have been allowed as a credit for state death taxes under the Federal tax before 2002. The net effect is a substantial increase in the total of Illinois and Federal estate taxes.

The pre-2002 Federal credit was based on the adjusted taxable estate which is the taxable estate less $60,000. The Federal state death tax credit schedule was (and thus the Illinois estate tax schedule is):

View Illinois Estate Tax Schedule.

There is a federal tax on estates and gifts. Some states also have taxes. Before 2003 Illinois taxed estates only if there was a federal tax. The Illinois tax was the amount of the federal credit for state taxes so there was no increase over the federal tax without a state tax. However, the federal tax credit

The federal tax is a single tax on all transfers either during life (gifts) or at death. It is progressive and starts at 18% on the first $10,000 of transfers and goes up to 50% after transfers exceed $2.5 million. It is cumulative so each gift adds to the amount to be taxed. Give a non-exempt gift of up to $10,000 this year and the tax is 18%. Give a non-exempt gift of $10,000 next year and you are in the $10,000 – $20,000 bracket where the tax is 20%. If you then die with a taxable estate of $1,000,000 the top tax rate is 41% because now you are in the bracket applicable to $1,020,000.

Or to put it another way – if you give away $1 million of taxable gifts during life and die with a taxable estate of $1 million your remaining $1 million is subject to the marginal tax rate for $2 million estates. For state taxes is being lowered so Illinois now imposes an estate tax in the amount the federal credit used to be.