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Updated on Friday, July 16, 2021
New Jersey charges an inheritance tax, though it stopped charging estate taxes in 2018. However, residents of the Garden State could owe federal estate taxes.
Estate and inheritance taxes are a way for the federal government and for states to raise money when a person dies and transfers property to their heirs. Estate taxes come out of a deceased person’s overall estate before the remainder is paid out to the heirs, whereas an inheritance tax is the responsibility of each individual heir, based on what they receive.
The current rates for New Jersey residents are as follows:
- Estate tax rate range: N/A
- Estate tax exemption in New Jersey: N/A
- Inheritance tax in New Jersey: 0% to 16%
- Federal estate tax in New Jersey: 18% to 40% on estates over $11.7 million
- Estate planning strategies in New Jersey: Gifting, life insurance, trusts, charitable contributions
Estate planning can help you manage your assets and find ways to reduce how much you owe for these taxes. A financial advisor could help, as this can be one of their areas of specialty. Here’s a roundup of the best advisors in New Jersey if you’re looking for assistance, and read on for more information on New Jersey’s estate and inheritance taxes.
New Jersey estate tax
New Jersey once had an estate tax but its government voted to get rid of it in 2016. The estate tax started being phased out in 2017, before ending completely starting on Jan. 1, 2018. Under current law, anyone who passes away now won’t owe estate tax to the New Jersey state government. However, New Jersey residents could still owe estate taxes to the federal government.
Now that there’s no longer an estate tax in New Jersey, only 12 state governments (along with the District of Columbia) still charge this tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.
Estate tax exemption in New Jersey
An estate tax exemption is the amount a person can leave behind to their heirs without owing estate taxes. Since New Jersey no longer charges estate taxes, the exemption is no longer applicable.
Before the government voted to remove this tax, the New Jersey estate tax exemption was $675,000 in 2016, and later transitioned to $2 million in 2017. Now, residents can leave any amount without owing New Jersey estate taxes.
Inheritance tax in New Jersey
New Jersey still charges an inheritance tax, one of only six states that charges this tax. A key difference with an inheritance tax is that it’s paid for by each individual heir based on what they receive, rather than one tax paid by the final estate.
For inheritance taxes in New Jersey, the rates and amount owed depend on the relationship of the heir to the deceased. There are four classes of heirs, also known as beneficiaries:
- Class A: Spouses, domestic and civil union partners, children, grandchildren, great-grandchildren, stepchildren, parents and grandparents
- Class C: Siblings, half-siblings, sons-in-law, daughters-in-law, widow or widower of your deceased child
- Class D: Anyone who is not Class A or Class C — could include friends, cousins, nephews, nieces, fiancé(e) or non-civil union partner
- Class E: Tax-exempt entities like charities and nonprofits
New Jersey removed Class B in 1963 and it no longer exists.
Here are the current New Jersey inheritance tax rates for the different classes:
|New Jersey Inheritance Tax Rates|
Class of beneficiary
Inheritance tax rates
|No inheritance tax|
|First $25,000 – tax-free|
Next $1,075,000 – 11%
Next $300,000 – 13%
Next $300,000 – 14%
Over $1,700,000 – 16%
|First $700,000 – 15%|
Over $700,000 – 16%
|No inheritance tax|
Federal estate tax in New Jersey
On top of inheritance taxes, New Jersey residents could also owe estate taxes to the federal government. The federal government only charges this tax on very large estates — the 2021 exemption is $11.7 million, meaning you can leave this much property behind estate tax-free. The tax rates for amounts above the exemption are outlined in the table below.
|Federal Estate Tax Rates 2020-2021|
|Taxable amount (estate value above the exemption)||Tax rate||Tax owed|
|$0 to $10,000||18%||Up to $1,800|
|$10,001 to $20,000||20%||Up to $4,000|
|$20,001 to $40,000||22%||Up to $8,800|
|$40,001 to $60,000||24%||Up to $14,400|
|$60,001 to $80,000||26%||Up to $20,800|
|$80,001 to $100,000||28%||Up to $28,000|
|$100,001 to $150,000||30%||Up to $45,000|
|$150,001 to $250,000||32%||Up to $80,000|
|$250,001 to $500,000||34%||Up to $170,000|
|$500,001 to $750,000||37%||Up to $277,500|
|$750,001 to $1 million||39%||Up to $390,000|
|Over $1 million||40%||40 cents of every dollar over $1 million|
How to pay your estate taxes
When someone dies, they will name in their will a person or organization to be the executor of their estate. This could be a member of their family or a professional, like an attorney or accountant. If the deceased died without a will, the state courts pick someone for this role. The executor is in charge of determining the final market value of the deceased’s estate and whether taxes apply.
If the deceased does owe federal estate taxes, the executor files an estate tax return with the IRS, showing the value of the estate and how much is owed for taxes; this must be filed within nine months of the person’s death. The executor must also pay any necessary taxes out of the estate before they can distribute the remainder to the heirs.
For New Jersey inheritance taxes, the process is similar. The executor reviews the value of the estate as well as who is set to inherit property, including which class of beneficiary they are. If the executor determines an heir owes inheritance tax, either the heir or the executor must then prepare an inheritance tax return, NJ Form IT-R. This form lists how much the person will inherit and the taxes owed, and it must be submitted to the New Jersey Division of Taxation within eight months of the person’s death.
The heir must also pay the taxes owed before legally transferring the property to their name. They’re supposed to complete this process and pay the taxes within eight months of the person’s death. If not, New Jersey charges interest at an annual rate of 10% on the unpaid balance.
Estate planning strategies
With estate planning, you determine how and when to transfer your assets to others. By figuring this out before you die, there are ways to reduce inheritance taxes in New Jersey. Here are some of the strategies to consider.
Gift tax and gifting
One way to reduce inheritance tax for your heirs is to give property away before you die — that way, it’s no longer part of your taxable estate at death. In New Jersey, the inheritance tax still applies to any gifts made within three years of your death. However, if you transfer property before then, your heirs won’t need to pay the New Jersey inheritance tax.
If you’d like to leave an inheritance to people who would likely owe inheritance taxes — like siblings, cousins or friends — consider making those transfers well before you die while saving the rest of your estate for family members who wouldn’t owe the inheritance tax, like spouses and children.
At the federal level, the IRS taxes sizable gifts, so this isn’t a way to completely avoid taxes. In 2021, you can give up to $15,000 per year per person with no tax consequences, but if you give away more than that to any person, then gift taxes could apply.
Gift taxes follow the same exemption as estate taxes. As of 2021, you can give away up to $11.7 million away in your lifetime without owing gift taxes. If you give away anything above this limit, the IRS charges gift taxes based on how much you’re over, with a maximum rate of 40% — the same as estate taxes. In addition, the executor will need to deduct whatever you gave away from gifts from the estate tax exemption. If you gave away $1.7 million before dying, your federal estate tax exemption is just $10 million ($11.7 million minus $1.7 million).
Still, giving away property can help you reduce taxes if you give away property that appreciates in value. For example, if you own stock worth $5 million that you expect to grow to $10 million when you die, you could gift it now so the taxable transfer is just $5 million, not the future $10 million.
A trust is a legal entity used to leave property behind to others. You first transfer the title and ownership of assets to the trust. Then, you write up instructions for who would receive the property when you die and over what timeline. The trust could pay everything out at once when you die, or pay out over time. An example of the latter would if you wanted to delay giving an inheritance to your 18-year-old grandchild until they turn 25.
There are two main types of trusts: revocable and irrevocable:
- Revocable: A revocable trust is one that you can change and cancel anytime you want, and this lets you get your assets back if needed. Since you still control the property, these trusts don’t help avoid the federal estate tax; anything held in a revocable trust still gets added to your taxable estate. However, you could use a revocable trust to help someone avoid the inheritance tax. If you set up the trust to pay out the assets over a long period of time rather than all at once, New Jersey will come up with a compromise tax estimate of the trust’s value, potentially saving your heir money.
- Irrevocable: An irrevocable trust is harder to change. Once you transfer property into an irrevocable trust, you lose control and cannot make changes yourself to the trust documents, details and beneficiaries. In exchange, irrevocable trusts give you more estate planning benefits. Not only can an irrevocable trust help with the New Jersey inheritance tax, it can also reduce the federal estate tax. When you move property into the irrevocable trust, it counts as a gift. And while gift taxes apply, this is a way to transfer out property that will gain in value now, so there’s less owed for estate taxes later.
New Jersey doesn’t charge inheritance tax on life insurance death benefits. If you’re trying to leave money behind to a beneficiary who would owe inheritance taxes, another option is to use that money instead to buy a life insurance policy on yourself. When you die, your heir would receive those proceeds without owing New Jersey inheritance taxes.
However, the size of the life insurance death benefit does count toward your total taxable estate for the federal taxes. For example, if you own a $2 million life insurance policy, it would increase the size of your estate by $2 million when you die.
The Generation Skipping Transfer (GST) tax is a way for the government to prevent people from avoiding a round of estate taxes by leaving an inheritance to a younger generation. For example, rather than leaving the inheritance to your children who would then owe estate taxes leaving money to their children, you instead transfer property directly to your grandchildren, skipping a generation.
When people make these transfers, the IRS can charge the GST tax to make up for this generational skip. You can leave up to $11.7 million over your lifetime — the lifetime gift exemption — to younger generation heirs like grandkids without owing the GST tax. You can also give each heir $15,000 a year gift and estate tax-free, so this is another way to get money out of your estate without owing the GST tax.
Neither New Jersey nor the IRS charge estate or inheritance taxes on property left to charities, and there’s no limit on the amount you can donate to charity estate and inheritance tax-free. If you think you’ll owe estate taxes at death and would rather support a charity instead, you could choose to donate the extra amount to charity so it reduces your taxable estate. For example, if you’re worth $13.5 million, you could donate $2 million to charity which pushes the rest of your estate below the $11.7 million federal tax exemption.
There are a few ways to make these charitable donations. You could make a bequest directly from your will, given at the time of your death. If you have retirement plans, like a 401(k) or IRA, you could make charitable rollovers of the balances directly to charity while you’re alive. Otherwise, your heirs would have to pay income tax for taking that money out of those inherited retirement plans, as well as possible estate and inheritance taxes.
Another strategy is to give away investments in a taxable brokerage account, as this saves taxes in multiple ways. First, you get the property out of your taxable estate. Second, you get a charitable income tax deduction now for the full value of the investment. Last, you never have to sell the investment — this means that you avoid capital gains.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.