Demystifying Inheritances Taxes in New Jersey to Plan for the Road Ahead
If you’ve lost a loved one who lived in New Jersey, or you’ve inherited something from someone who owned property here, you might hear the term “inheritance tax.” Many people think inheritance tax and estate tax are the same, but in New Jersey, they are different. New Jersey no longer has an estate tax, but it still has an inheritance tax—and it can impact how much of the inheritance you actually receive.
This blog will explain how the New Jersey inheritance tax works, who has to pay it, how much it might cost, and what to keep in mind during estate planning.
What Is the New Jersey Inheritance Tax?
New Jersey’s inheritance tax is a state tax on the right to receive assets from someone who has passed away. It is not based on the total value of the estate. Instead, it depends on who you are in relation to the person who died.
Even though New Jersey got rid of its estate tax for deaths after January 1, 2018, the inheritance tax still applies. It’s one of only a few states that still has one. And unlike the estate tax, it is paid by the person receiving the inheritance—not by the estate itself.
Who Has to Pay Inheritance Tax in New Jersey?
The tax applies based on the relationship between the person who passed away (called the decedent) and the person receiving the inheritance (the beneficiary). New Jersey puts people into different “classes” for tax purposes. Each class has different tax rules.
Class A
This class includes:
- Spouses or civil union partners
- Children, stepchildren, grandchildren
- Parents and grandparents
Class A beneficiaries do not have to pay inheritance tax. They are fully exempt.
Class C
This includes:
- Siblings
- Sons-in-law and daughters-in-law
- Surviving spouses of deceased children
Class C beneficiaries do not pay tax on the first $25,000 they receive. After that, the rates are:
- 11% on the amount from $25,001 to $1.1 million
- 13% on the amount from $1.1 million to $1.4 million
- 14% on the amount from $1.4 million to $1.7 million
- 16% on anything above $1.7 million
Class D
This includes all other individuals not listed in Class A, C, or E, such as:
- Friends
- Cousins
- Nieces and nephews
- Fiancés
Class D beneficiaries pay:
- 15% on the first $700,000 they receive
- 16% on any amount above $700,000
Any transfer under $500 is not taxed.
Class E
This class includes organizations like:
- Charities
- Religious institutions
- Non-profits
Class E is also fully exempt from inheritance tax.
What Kind of Property Is Taxed?
The inheritance tax applies to both real and personal property located in New Jersey. This includes:
- Homes and land
- Bank accounts
- Stocks and bonds
- Jewelry or collectibles
However, if a life insurance policy pays out directly to a named person, that money is not taxed. It is only taxed if the payout goes to the estate.
What If the Person Who Died Wasn’t a New Jersey Resident?
The inheritance tax usually applies to residents of New Jersey. But even if someone lived in another state, their estate might owe inheritance tax if they owned real estate or tangible property in New Jersey. So, if someone from Pennsylvania owned a vacation home at the Jersey Shore, the person who inherits it may still owe tax.
Figuring Out Residency and Domicile
Domicile means where someone lived most of the time and intended to make their home. To decide if New Jersey inheritance tax applies, the state will look at where the person lived, where they spent most of their time, and where their main belongings were. Owning a home or spending more than 183 days in New Jersey in a year are strong signs of residency.
Who Files the Inheritance Tax Return?
Usually, the executor of the estate or the person handling the estate files the tax return. If you’re receiving money or property and you are not a Class A or Class E beneficiary, you may also need to help with the paperwork. The tax return is due within eight months of the person’s death. If the tax is not paid on time, interest of 10% per year can be charged. Also, the state places a 15-year lien on any real property until the tax is paid.
Planning Around the Inheritance Tax
While the inheritance tax can be high for Class C or D beneficiaries, there are ways to reduce how much is owed. For example:
- Gifting assets during your lifetime may help reduce the taxable value of your estate.
- Life insurance payouts to named people are exempt.
- Setting up trusts or changing where property is located can also help, but must be done carefully.
It’s important to look at who you want to inherit your property and what class they fall under. This can help you plan in a way that protects more of your assets for your loved ones.
Get Legal Help Today
New Jersey’s inheritance tax affects many people who receive money or property from a loved one. Whether you’re planning your estate or you’ve been named as a beneficiary, it’s helpful to know how this tax works and what to expect. The amount you owe depends on who you are to the person who died, what kind of property you’re receiving, and where that property is located.
If you have questions about how this tax might affect you or your family, or you’re trying to avoid problems down the road, call (732) 229-3200 to speak with a lawyer who can guide you through the process.