Inheritance and estate taxes are taxes that arise upon someone’s death in connection with assets left to heirs. They are often used interchangeably in conversation but are, in fact, quite different. Here’s what New Jersey residents need to know about inheritance taxes.
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How does the New Jersey inheritance tax work?
The State of New Jersey imposes an inheritance tax on those who inherit New Jersey property or assets. Beneficiaries (or inheritors) are divided into classes, based on their relationship to the decedent.
Class A beneficiaries are close relatives of the deceased. That includes the spouse, civil union partner or domestic partner, and children, stepchildren, grandchildren and great-grandchildren, as well as parents and grandparents. These beneficiaries inherit tax-free, as do Class E (qualified charities and governments) beneficiaries. (Class B is a beneficiary designation that no longer exists.)
Class C beneficiaries are other close family relatives, mainly siblings, sons- or daughters-in-law. There is a $25,000 exemption for amounts inherited by Class C beneficiaries. Further amounts are taxed as follows:
- 11% on the first $1,075,000 inherited above the exemption amount.
- 13% on the next $300,000.
- 14% on the next $300,000.
- 16% on the amount above $1,700,000.
All other beneficiaries are Class D and can receive $500 tax free. Inheritances above $500 are taxed at 15% of the first $700,000 inherited (with no exemption) and 16% on the amount over $700,000.
Who has to pay inheritance taxes?
Inheritance taxes are paid on the value of assets inherited by a beneficiary. The beneficiary inheriting the assets pays the tax. Whether inheritance taxes are due and the amount will vary based on several factors, including the beneficiary’s relationship to the deceased. An inheritance bequeathed to a spouse is exempt in New Jersey, and inheritances to children are also tax-free. In other states they may be taxed at less than the full rate.
Note that the money inherited by an heir is generally not considered to be income for federal or state income tax purposes. However, any income earned from the assets inherited, such as, for example, dividends on stocks, could be subject to income taxes.
Read more: The Best Tax Software of 2024
How much is the inheritance tax by state?
Inheritance tax rates vary by state. The current rates for the six states that levy this tax are:
- Iowa – ranges from 0% to 6%
- Kentucky – ranges from 0% to 16%
- Maryland – ranges from 0% to 10%
- Nebraska – ranges from 0% to 18%
- New Jersey – ranges from 0% to 16%
- Pennsylvania – ranges from 0% to 15%
These states also have an exemption threshold below which the tax is not assessed.
- Iowa – $25,000
- Kentucky – ranges from $500 to $1,000
- Maryland – $1,000
- Nebraska – $25,000; $40,000; or $100,000 depending upon circ*mstances
- New Jersey – $25,000
- Pennsylvania – no exemption
Inheritance taxes vs. estate taxes
Inheritance and estate taxes are commonly lumped together in conversation. They are, however, two different and distinct types of taxes on inherited assets. Estate taxes are levied at the federal level, though there are several states that have their own version of the estate tax in addition to what might apply at the federal level.
Federal estate taxes are levied on the value of the deceased’s estate. In 2023, the federal estate tax applies to estates that exceed $12.92 million. This limit could continue rising until 2026, which is when the Tax Cuts and Jobs Act exemptions will expire. At that point, barring any changes, federal estate taxes will revert back to the $5 million, indexed for inflation, threshold that was in place before. Estates of decedents who die during 2024 have a basic exclusion amount of $13,610,000, increased from $12,920,000 for estates of decedents who died in 2023.
The estate tax limits are actually a combined lifetime gift and estate tax limit. If someone passes away in 2023, for example, any liability for estate taxes would include the value of their assets left to heirs upon their death as well as the value of any gifts they gave over their lifetime.
The federal estate tax rate is 40% of any assets in an estate upon death in excess of the annual limit. So, for example, if a person’s estate was valued at $15 million at death, in 2023 the amount to be taxed would be $15 million less $12.92 million or $2.08 million. This amount would be taxed at 40%, resulting in an estate tax of approximately $832,000.
As a practical matter, there are not a lot of people who die with an estate of this size. Additionally, in the case of a married couple, spouses can generally leave their assets to the surviving spouse with no estate tax liability.
In addition to the federal estate tax, 12 states plus Washington D.C. have an estate tax at the state level. These states don’t always apply the same rates and criteria as the federal government. Instead, most of them have their own estate tax rates and thresholds.
- Connecticut – 11.6% to 12% on estates above $12.92 million
- Hawaii – 11.2% to 16% on estates above $5.49 million
- Illinois – 0.8% to 16% on estates above $4 million
- Maine – 8% to 12% on estates above $6.01 million
- Maryland – 0.8% to 16% on estates above $5 million
- Massachusetts - 0.8% to 16% on estates above $1 million
- Minnesota – 13% to 16% on estates above $3 million
- New York – 3.06% to 16% on estates above $6.11 million
- Oregon - 10% to 16% on estates above $1 million
- Rhode Island - 0.8% to 16% on estates above $1.65 million
- Vermont – 16% on estates above $5 million
- Washington – 10% to 20% on estates above $2.19 million
- Washington D.C. – 11.2% to 16% on estates above $4.25 million
As mentioned previously, Maryland is the only state with both an inheritance tax and an estate tax at the state level.
Inheritance taxes are levied on the assets actually received by the beneficiary of the estate. This means that taxes are due based on the amount inherited and are due from the person inheriting the assets. Conceivably, the heir may need to sell a portion of their inheritance if it is in the form of securities, real estate or any type of asset other than cash to pay the tax.
These taxes are not prevalent across the United States as only six states have an inheritance tax. However, if you live in one of these states and inherit a sizable estate, the size of your inheritance may be significantly diminished by both the estate taxes due at the federal level and the inheritance taxes due in your state. Check with a tax professional at H&R Block to find out more.
How do you avoid the inheritance tax?
There are generally exceptions and exemptions from inheritance taxes for spouses and, in some cases, children. Beyond that, however, the tax will generally need to be paid if the beneficiary doesn’t qualify for an exemption from the tax.
One tactic that can be used by the person whose estate would be passed down to heirs in a state where it will be subject to an inheritance tax is to purchase a life insurance policy up to the amount they want to bequeath. The death benefit from the policy is not subject to the inheritance tax and can be used to supplement the amount that may be lost to inheritance taxes.
You could also place assets in an irrevocable trust for your heirs. This would remove the assets from your estate and the proceeds of the trust would not be subject to inheritance taxes when distributed.
Since inheritance taxes are imposed based on the state where the deceased lives, they could relocate to another state prior to their death. There may be time considerations to establish residency in a new state, so that is a consideration as well. Additionally, in the case of assets like real estate, the location of the asset in the state imposing the inheritance tax could be the deciding factor versus whether the deceased was a resident of the state.
Frequently asked questions (FAQ)
Is there an inheritance tax in the State of New Jersey?
Yes. New Jersey is one of six states whose residents are potentially subject to an inheritance tax. An inheritance tax is assessed at the state level on assets inherited from someone else. The other states are:
- Iowa.
- Kentucky.
- Maryland.
- Nebraska.
- Pennsylvania.
Note that Maryland levies both an inheritance tax and an estate tax and that Iowa is phasing out its inheritance tax and will completely abolish it by 2025.
How much can you inherit in NJ without paying tax?
The answer depends on your relationship to the person who died. You’re exempt from the state’s inheritance tax if you’re a Class A beneficiary, meaning the spouse or civil union partner or domestic partner of the deceased. Also exempt: children, stepchildren, grandchildren and great-grandchildren, as well as parents and grandparents.
Who is required to file a NJ inheritance tax return?
If required to file an inheritance tax return, the executor, administrator, or heir-at-law of the estate must file within eight months of the person's death. If there’s tax due, that must also be paid on the transfer of taxable real or personal property within eight months of the date of the decedent’s death.
