Inheritance Tax, also referred to as the death duty, is the set of taxes which has to be paid by an individual (heir) on inheriting the estate of a deceased person. It is calculated by taking the total value of the property and money into consideration. The norms of inheritance tax can differ from nation to nation; and within a nation from state to state. In Kentucky, for instance, the due date for the same (Kentucky inheritance tax) is 18 months from the person's death, while the same in case of New Jersey inheritance tax is 8 months from the person's death. As this tax is not a prominent contributor to the treasury, it is not considered as important as the income tax.
Inheritance Tax in the United States
As we said earlier, the norms of imposing inheritance tax within a nation can differ from one state to another. In the United States of America, Indiana, Kentucky, Pennsylvania, Iowa, Maryland, Nebraska and New Jersey collect inheritance tax. Generally, two things are taken into consideration when imposing this tax:
- The sum value of the estate
- The inheritor's relationship with the deceased
Inheritance Tax in New Jersey
New Jersey inheritance tax is the tax levied on an individual when the real or personal property, amounting to US$500 or more, of a deceased person is transferred to him. The graduated inheritance tax ranges between 11-16 percent, depending on the aggregate value of the estate and his relationship with the deceased. The estate passed on to immediate relatives though, is exempted from this tax; so is the estate which is donated in form of charity. The tangible or intangible property of a deceased who happens to be a resident of New Jersey, wherever it is situated, is subject to inheritance tax. If the person is not a resident of New Jersey, however, only his tangible property in the state is subject to this tax.
In New Jersey, the inheritance tax, which is to be paid by the legal beneficiaries, and the estate tax, which is to be paid from the assets in the estate before distribution, are considered to be two different concepts. In cases wherein the deceased person was a resident of New Jersey, assets such as stocks, bonds and security are subject to this tax. Income from life insurance contract of the deceased person is directly payable to the beneficiaries, and hence is not considered taxable as per the New Jersey inheritance tax laws.
Tax Rate and Exemptions for Beneficiaries
The beneficiaries/heirs of the estate are categorized into different classes on the basis of their relationship with the decedent. Generally, the inheritance tax is imposed at the graduate rate ranging between 11-16 percent. However, the exemption amount and the tax rate varies from one class to another.
- Class A beneficiaries, which includes the spouse, civil union partners, children (including the adopted children) and the parents of the decedent, are totally exempted from paying the inheritance tax in New Jersey.
- Class B, which existed initially, was deleted by amendment 7/1/63.
- Class C beneficiaries, which includes the brother, sister, son-in-law or the daughter-in-law of the deceased person, are granted an exemption for the first $25,000 and taxed at 11 percent for the next $1,075,000 and 16 percent for over $1,700,000.
- Class D beneficiaries i.e. other beneficiaries who do not feature in any other list of beneficiaries, are taxed at 15 percent for the first $700,000 and 16 percent for the estate amounting in excess of $700,000.
- Class E beneficiaries, which includes the transfers to the State of New Jersey, organizations working for people's welfare, non-profit agencies, educational institutes, hospitals, etc., are also totally exempted from this tax.
Filing and Payment
If the beneficiaries are subject to New Jersey inheritance tax, they have to file the returns. If the decedent was a resident of New Jersey, Form IT-R should be used, and if the decedent was not a resident, then Form IT-NR should be used. If the beneficiaries, being the immediate relatives, are exempted, then they don't have to file the returns. They will have to use Form L-8 in order to release bank accounts, stocks, bonds etc, and Form L-9 in order to release the State's lien on real property.
Before transferring the assets like real estate or stocks, the beneficiary has to obtain a written consent from the Director of the New Jersey Division of Taxation. This waiver, which is not required when Forms L-8 and L-9 are not applicable, is not granted until the tax due is paid (or provided for). The due date to pay this tax in New Jersey is 8 months after the death of the person whose estate will be passed on to the heir. Tax debt, if any, after the due date is subject to interest.
Even though, both inheritance tax and estate tax are based on the same principle, (i.e. when an individual is legally named the heir of the estate, he is liable to pay a particular sum to the administrative body), the state government is assigned with the responsibility to collect the inheritance tax, while the federal government collects the estate tax. From a layman's point of view, the intricate details of inheritance tax and estate tax can turn out to be a bit confusing.
If you have any doubts, you can always obtain additional information from the Division of Taxation, Department of the Treasury of the state of New Jersey.