New Jersey has the reputation of being one of the heaviest taxed states in the nation. In nearly every tax category including income, sales, property, corporate, estate and inheritance tax, New Jersey rates one of the highest in the nation. It’s no wonder that residents of the Garden State are moving to other states. It is estimated that New Jersey lost $20.7 billion in net adjusted gross income due to out migration since 2005 resulting in the loss of $13.1 billion in economic output and nearly 87,000 jobs.
On October 14, 2016 Governor Chris Christie signed into law the Transportation Funding Bill which increased New Jersey’s gas tax by 23-cents-a-gallon and repealed the state’s estate tax. Up to this point, New Jersey was one of only two states in the nation with both an estate and inheritance tax. Now Maryland stands alone.
Prior to the passing of this legislation, New Jersey had the lowest estate tax exempt threshold in the nation at $675,000. Effective January 1, 2017, the estate tax exemption increased to $2 million for deaths as of January 1, 2017, and the estate tax will be eliminated as of January 1, 2018. In addition, this legislation eradicated a provision that imposed estate tax on New Jersey property of nonresident decedents.
Although most people agree that the repeal of the estate tax is good news, New Jersey is one of six states in the nation that has an inheritance tax which is levied on the transfer of assets to certain beneficiary classes based on their relationship with the deceased. For example, Class A beneficiaries (spouses, civil union or domestic partners, children, stepchildren, grandchildren, parents and grandparents) are exempt from inheritance tax. Class C beneficiaries (siblings, son-in-laws and daughter-in-laws, nieces and nephews) are not. The inheritance tax rate in New Jersey ranges from 11% to 16% based on the value of transferred assets.
Pennsylvania, who also has an inheritance tax, bases its rate on the percentage of the asset value of a decedent’s estate transferred to beneficiaries by will, heirs by intestacy and transferees by operation law. The tax rate depends on the relationship the beneficiary had with the deceased. For instance, transfers of assets to a surviving spouse or a parent(s) of a child aged 21 or younger are not taxed. Transfers of assets to direct decedents and lineal heirs are taxed at a rate of 4.5%, siblings at 12%, and other heirs (except charitable organization, exempt institutions and government entities which are exempt by law) at 15%.
In addition to state imposed estate or inheritance taxes, there is currently a 40% federal estate tax levied on beneficiaries of $5.45 million or more in assets ($10.9 million for married couples). Although President Donald Trump’s Administration is contemplating repealing the estate tax, it will be replaced with another type of tax. An option under consideration is a mark-to-market event at death that would trigger capital gains on the estate assets which could possibly reduce the tax rate to 20%.
Time will tell what will happen at the federal level. In the interim, New Jersey residents should review their will. It may contain trust language designed to take advantage of the $675,000 estate tax exemption which was in place. Depending on how your will is worded, the trust could be too large or small. In addition, trusts, partnerships, limited liability corporations, and annuities intended to avoid estate taxation may no longer be necessary.
We are happy to discuss how you may be impacted. Feel free to contact either Michael Sexton, CPA, CCIFP, Director – Tax Services (Michael.Sexton@MCC-CPAs.com) or me (Marty.McCarthy@MCC-CPAs.com) at 610-828-1900.
Disclaimer: This article is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).