When someone dies, the people left behind are often stunned and shocked by the taxes they have to pay. They hear all kinds of scary terms like “estate tax” and “inheritance tax,” and they don’t know what the difference between the two is, or even if there’s a difference at all.
People fear what will happen if they don’t pay the right amount, and don’t know how to determine what the right amount might be. Explore a primer on the similarities and differences between an estate tax and inheritance tax, and how a New Jersey tax attorney can help you.
Death Taxes: Estate vs. Inheritance
Ever since the most recent changes to the New Jersey inheritance tax and estate tax laws, which occurred as a result of the same bill that raised the gas tax in the state, there has been confusion about the difference between the two. Estate and inheritance taxes are two different taxes, but both fall under the overall umbrella of death taxes.
The federal government has an estate tax, but no inheritance tax. Currently, this tax rate is at 40 percent, with an exemption of $5.49 million. This tax rate is applied to the taxable portions of the estate that exceed the exemption amount, and tax is reported and paid on the estate tax return of the decedent.
The taxable estate is, in general, based on the current market value of the assets possessed by the decedent on the date of their passing. This total is then reduced by debts, expenses and certain other liabilities as well as deductions like unlimited charitable and marital deductions. The remaining amount after all deductions is then subject to the estate tax to the extent that it exceeds the exemption amount.
New Jersey Estate Tax
The New Jersey estate tax currently exists and works much like the federal tax, but with an exemption of $2 million, for decedents dying after January 1, 2017, and a 16% tax rate. This means an estate tax is only paid on estates worth more than the exemption amount, and the tax is 16% of the portion that exceeds the exemption, minus allowable deductions. It’s important to note that currently the estate tax in the Garden State is scheduled to be repealed at the beginning of 2018. However, with a gubernatorial election between now and then, the scheduled repeal is in doubt.
New Jersey Inheritance Tax
An inheritance tax is based on the beneficiary’s relationship to the decedent as well as the amount received by the beneficiary. The federal government does not impose an inheritance tax, but New Jersey does. Spouses, children, and grandchildren are exempt in New Jersey, but siblings, nieces, and nephews are not. Each category of the beneficiary is subject to its own exemption amount and tax rate.
However, the current books are written in such a way that inheritance and estate taxes offset one another. This means that, in theory, no one should pay more through the combination of taxes than they would normally pay for the greater of the two when calculated separately.
New Jersey Tax Attorney
It’s tricky to understand the death taxes in New Jersey, the classes of beneficiaries, and the tax rates paid based on the different levels of an estate, relationships and the like. If you’re facing the need to close an estate, it can be helpful to talk with a qualified and experienced New Jersey tax attorney.
At Scarinci Hollenbeck, we have years of experience in dealing with these complex issues. Therefore, if you have any questions or if you would like to discuss the matter further, please contact me, Amy Van Fossen, at 201-806-3364.