An Overview of Death Taxes in New Jersey

Persons passing away as residents of New Jersey may have their estates subject to potentially three death taxes. These taxes are the Federal Estate Tax (FET), the New Jersey Estate Tax (NJET) and the New Jersey Inheritance Tax (IT). This article will provide a brief overview of these death taxes.

The Federal Estate Tax is an estate tax imposed by federal law. In 2000, the FET was imposed on the gross assets of estates in excess of $675,000.00. In 2002, as part of the “Bush Tax Cuts” the FET threshold was increased over the years so that in 2010 there was no FET at all. As part of the continuation of the Bush Tax cuts, the FET was set at $5,000,000.00 for persons passing away in 2011 and 2012. Congress will have to revisit the FET threshold for 2013, but it is unlikely it will be reduced below $5,000,000.00. The FET tax rate is very high, starting at 35%. For the majority of persons reading this article, the FET is not a concern.

The New Jersey Estate Tax was often referred to as a “sponge tax.” This meant that a percentage of the FET was paid to the State of New Jersey. After the FET threshold was raised in 2002, the State clarified that the NJET would remain in effect for estates in excess of $675,000.00, no matter how high the threshold for the FET would become. Many individuals in the Ocean County area find that their estates are in excess of the NJET threshold. The good news is that the tax rate for the NJET is relatively low. For example, a $675,000.00 estate would be taxed at the rate of 3%. An estate of $1,000,000.00 would be taxed at the rate of 4.6%.

The final death tax is the New Jersey Inheritance Tax. This is a tax imposed upon the beneficiaries of the estate based upon the class of person inheriting. As of the mid-1980’s, spouses and lineal descendants of the decedent have been totally exempt from the IT. Siblings of the decedents are entitled to a $25,000.00 exemption and then are taxed at the rate of 11% up to $1,000,000.00, and the tax rate increases after that. All other beneficiaries are taxed at the rate of 15% up to $700,000.00 and 16% in excess of that amount. There is no tax on inheritances of less than $500.00. There is no tax in bequests to recognized charities.

The topic of death taxes in New Jersey is complicated and subject to many regulations and exceptions. There are ways to avoid or reduce some of these taxes. This article is intended only as an overview and is not intended to provide tax planning advice. For more information an attorney or accountant experienced with these taxes should be consulted.