Over the past decade or so, many states have been eliminating their inheritance tax. In fact, only five states still have an inheritance tax, including New Jersey, Kentucky, Maryland, Nebraska and Pennsylvania. Though, at least our state, unlike Maryland, does not have both an estate and inheritance tax. Though, understanding the inheritance tax when doing an estate plan is extremely important.
New Jersey inheritance tax
The inheritance tax applies to those assets (gifts) transferred to another after death, or within three years of death. How one is taxed is based on the relationship to the person that passed, with spouses (exempted) getting better tax treatment than siblings ($25,000 exemption). For example, if one is leaving $2,500 to their brother, the brother will be forced to file a 22-page inheritance tax return, but he will owe no money, except for the cost associated with this additional tax filing, if any. However, if one wants to leave $727,000 to a granddaughter, nephew or niece, their New Jersey inheritance tax bill will be nearly $110,000. In other words, 15% is taken off the top and given to our great state.
As our readers can see, heirs are not treated equally. Even though, we may treat are families the same, our state does not. This can complicate estate planning as these additional taxes can take huge chunks of an heir’s inheritance.
A problem for most
And, before one thinks that this is just an issue that the rich have to deal with, the Iowa Department of Revenue studied who inheritance taxes actually affect, and they found that over 90% of those effected made less than $80,000 a year. In fact, according to the Center on Budget and Policy Priorities report, these taxes regularly bring in about $5 billion a year for states that have these death taxes.
Federal death taxes may be on the horizon
Currently, there is a federal estate tax exemption up to $11 million per person, which essentially, abolishes the estate tax at the federal level, except for the wealthiest of the wealthy. However, a couple of proposals in the works may change this. For Haddonfield, New Jersey, looking into estate planning, understanding how federal and state taxes affect one’s estate can make a huge difference on what is actually transferred to our heirs.