Overview of New Jersey Inheritance Tax Rates and Laws
Learn How the New Jersey Inheritance Tax Affects Beneficiaries
The New Jersey inheritance tax affects the recipients of bequests from a will or trust. It's one of six states with an inheritance tax as of 2018, but it used to be worse. New Jersey used to impose both an inheritance tax and an estate tax up until January 1, 2018 when the estate tax was repealed.
The inheritance tax has been around since 1982, and it raised a pretty significant $354.58 million in revenue for the state in 2017, the last year for which comprehensive data is available.
Estate Tax vs. Inheritance Tax
An estate tax is based on the net value of all a decedent's assets after allowable deductions, credits, and exemptions. It's payable by the estate before bequests are made and inheritances are paid out.
The inheritance tax zeroes in on some beneficiaries, and it's based on the value of their specific bequests, not the entire estate. It's payable by the beneficiaries, although some estates will pay the tax for them.
What Beneficiaries Are Exempt?
Not every gift to every beneficiary is subject to the New Jersey inheritance tax.
Immediate family members are designated as Class A beneficiaries and they can inherit without paying the tax. They include spouses, parents, grandparents, and descendants—the children, grandchildren, and great-grandchildren of the deceased. The deceased's stepchildren are exempt from the tax as well, but the children and grandchildren of stepchildren are not.
New Jersey law has included civil union partners in this category since February 19, 2007, and domestic partners since July 10, 2004.
Qualified charities and certain religious, medical, educational, and nonprofit institutions are considered Class E beneficiaries under New Jersey law. They're also exempt from the inheritance tax.
Who Isn't Exempt and How Much Do They Pay?
Other classes of beneficiaries must pay the state's inheritance tax at a graduated tax rate depending on the value of their bequests.
Class C beneficiaries include siblings, as well as the spouses of children of the decedent—in other words, sons- and daughters-in-law. This rule also applies to the civil union and domestic partners of a decedent's children.
These individuals can receive up to $25,000 without paying an inheritance tax. Bequests exceeding $25,000 are taxed at rates from 11% to 16% depending on the gift's value. The greater the value, the greater the tax rate. Inheritances valued at more than $1.7 million are subject to the highest rate of 16% as of 2018.
Class D beneficiaries are those who don't fall into any other category, such as a decedent's niece, nephew, cousin, aunt, or uncle. They pay 15% on the first $700,000 they receive, and 16% on anything above that amount as of 2018.
There are no Class B beneficiaries as of 2019. The state legislature has eliminated this category.
Exempt Gifts and Inheritances
Bequests valued at less than $500 aren't taxed in New Jersey, nor are life insurance proceeds.
The gift must typically be conveyed via a will or trust, so posthumous payments made from the New Jersey Public Employees Retirement System, the New Jersey Teachers' Pension and Annuity Fund, and the New Jersey Police and Firemen's Retirement System are exempt as well.
Likewise, annuities paid to beneficiaries by the federal government under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan are exempt. Federal Civil Service retirement benefits are also safe.
When Is the New Jersey Inheritance Tax Return Due?
The New Jersey inheritance tax return—Form IT-R for residents or Form IT-NR for nonresidents—must be filed with the state and the tax paid within eight months of the decedent's date of death. The state will grant a filing extension for the return of up to an additional four months, but the tax itself must still be paid within eight months.
An estate's executor can file one return for all beneficiaries, typically collecting the tax out of their inheritances if the will or trust doesn't provide that the estate will take care of the tax for them, which occasionally happens.
How Is a New Jersey Inheritance Tax Lien Released?
The state automatically places liens against a decedent's property until inheritance taxes are paid, or until it's established that the recipient of the property is exempt.
Class A beneficiaries aren't required to file a New Jersey inheritance tax return, but they must file Form L-8 to secure the release of a New Jersey decedent's bank accounts, stocks, bonds, and brokerage accounts. Form L-9, or Form L-9NR for a nonresident decedent, must be filed to obtain a release from the state's lien if the decedent held title to any New Jersey real estate.
NOTE: State tax laws can change frequently, and the above information may not reflect the most recent changes. Please consult with an accountant or an attorney for current tax or legal advice. The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.