Sometimes, it seems like there is no end to the taxes Americans pay. This can vary by state. Most states, for example, don’t have an inheritance tax. However, New Jersey is among the six that can levy an inheritance tax on inheritances when a deceased lived in New Jersey or owned property here.
The key factors that determine whether and how much inheritance tax must be paid are the value of the inheritance and the beneficiary’s relationship with the deceased. Let’s take a brief look at how it works.
Who is exempt and who isn’t?
Most relatives are exempt from having to pay any inheritance tax. This includes spouses as well as domestic and civil union partners. It also includes children, grandchildren, parents and grandparents. Religious organizations, including schools, are also exempt, as are most charitable organizations.
Those relatives who aren’t exempt from the tax are assessed at a graduated rate. For example, siblings and children-in-law have to pay an inheritance tax on amounts they inherit valued at over $25,000. The rate of tax on amounts over that varies based on the value of the inheritance. More distant relatives, including nieces, nephews, aunts and uncles, are taxed either 15% or 16% on the full amount of their inheritance, with no initial $25,000 exemption.
It’s important to consider the potential tax impact of an inheritance on family members, other loved ones and organizations. No one wants any inheritance eaten up by taxes if it can be legally avoided.
Smart gifting and other estate planning strategies can be good options. With sound estate planning guidance, you can determine what works best for you, your family and your goals.