New Jersey Does Have an Inheritance Tax
Yes, New Jersey has an inheritance tax. It is separate from the state's estate tax, and the two work differently. The inheritance tax applies to what beneficiaries receive from a deceased person's estate, while the estate tax applies to the total value of the estate itself before distribution. Most states have one or the other; New Jersey is one of a small group that has both.
The inheritance tax rate depends on who inherits the money or property. Close relatives like spouses and children often pay nothing, while more distant relatives and unrelated people pay between 11% and 16% of what they inherit. The tax is paid by the person who receives the inheritance, not by the estate itself, though the executor usually handles the paperwork.
Key Takeaways
- New Jersey's inheritance tax applies to beneficiaries based on their relationship to the deceased, with spouses and children typically exempt.
- Tax rates range from 11% to 16% depending on whether the heir is a close relative, distant relative, or unrelated person.
- The executor of the estate files the inheritance tax return and reports what each beneficiary received.
- Certain assets like life insurance proceeds and retirement accounts pass directly to named beneficiaries and may not be subject to the inheritance tax.
Who Pays the Inheritance Tax and How Much
The inheritance tax is divided into four classes based on the beneficiary's relationship to the deceased. Class A beneficiaries—spouses, children, parents, and grandchildren—pay no inheritance tax at all. Class B beneficiaries, which include siblings and their descendants, pay 12.5% on amounts over $25,000. Class C beneficiaries are more distant relatives and pay 13.5% on amounts over $500. Class D beneficiaries are unrelated people and pay 16% on amounts over $500.
The thresholds mean that a sibling might inherit $30,000 and only pay tax on $5,000 of it (the amount above $25,000). An unrelated person inheriting the same amount would pay tax on $29,500. These rates and thresholds have remained stable for many years, though the state legislature can change them.
What Assets Are Subject to the Inheritance Tax
Most property that passes through a will or through the probate process is subject to the inheritance tax. This includes real estate, bank accounts, investment accounts, vehicles, and personal property. However, certain assets bypass probate entirely and go directly to named beneficiaries, which can affect whether the inheritance tax applies.
Life insurance proceeds paid to a named beneficiary are generally not subject to the inheritance tax. The same is true for retirement accounts like IRAs and 401(k)s that have a named beneficiary, as well as payable-on-death bank accounts and transfer-on-death securities. Property held as "joint tenants with rights of survivorship" passes directly to the surviving joint owner and is not subject to the inheritance tax. Understanding which assets avoid probate can significantly reduce the inheritance tax burden on your beneficiaries.
How the Inheritance Tax Return Is Filed
The executor of the estate is responsible for filing New Jersey's inheritance tax return, called Form IT-R. The return must be filed within nine months of the person's death, though an extension can be requested. The executor lists each beneficiary, their relationship to the deceased, and the value of what they inherited. The state then calculates the tax owed by each beneficiary based on their class and the amount they received.
The executor typically pays the inheritance tax from estate funds before distributing money to beneficiaries. If the estate does not have enough cash to cover the tax, the executor may need to sell assets or ask beneficiaries to contribute. Some beneficiaries may owe additional tax on their personal income tax return if the executor did not withhold enough, though this is less common.
Exemptions and Special Situations
Spouses are completely exempt from the inheritance tax, no matter how much they inherit. Children and grandchildren are also fully exempt. Parents and grandparents of the deceased are exempt as well. This means that in most family situations, the inheritance tax does not explore at all.
Charitable organizations and certain religious institutions are exempt from the inheritance tax. If you leave money to a may have access to charity, your beneficiaries will not owe tax on that portion of the estate. Some people structure their estates to take advantage of this exemption while still providing for family members. An estate planning attorney can explain how this works in your specific situation.
The Difference Between Inheritance Tax and Estate Tax
New Jersey's estate tax is a separate tax that applies to the total value of an estate before it is divided among beneficiaries. The estate tax only applies to estates worth more than $6.94 million (as of 2024, though this threshold changes yearly). The inheritance tax, by contrast, applies to what individual beneficiaries receive, regardless of the total estate size.
An estate could owe both taxes. For example, a large estate might owe the state estate tax on its total value, and then individual beneficiaries might owe inheritance tax on what they receive—unless they are in Class A and exempt. The executor handles both taxes, but they are calculated separately and serve different purposes.
Frequently Asked Questions
Do I have to pay inheritance tax if my parent dies and leaves me money?
No. Children are Class A beneficiaries and are completely exempt from New Jersey's inheritance tax. You will not owe any tax on what you inherit from a parent, regardless of the amount.
What if I inherit from a cousin or aunt?
Cousins and aunts are Class C beneficiaries (distant relatives), so you would owe 13.5% on amounts over $500. If you inherit $10,000, you would owe tax on $9,500. The executor will calculate this and report it on the inheritance tax return.
Does life insurance count toward the inheritance tax?
Life insurance paid to a named beneficiary is generally not subject to the inheritance tax because it does not go through probate. However, if the life insurance is payable to the estate itself rather than to a person, it may be subject to the tax. Check your policy to see who the beneficiary is.
Can I reduce the inheritance tax my beneficiaries will owe?
Yes. Using payable-on-death accounts, naming beneficiaries on retirement accounts and life insurance, and holding property as joint tenants can all keep assets out of probate and away from the inheritance tax. An estate planning attorney can review your situation and suggest strategies that fit your goals.
What happens if the executor does not file the inheritance tax return?
The state can impose penalties and interest on unpaid taxes. Beneficiaries may also be held responsible for the tax if the executor does not pay it. Filing the return on time protects both the estate and the beneficiaries from these consequences.