Understanding New Jersey Death Taxes: Part 2

There are a variety of transfer taxes which affect a decedent’s estate.  In the State of New Jersey, the estates of decedents are subject to two primary forms of death tax.    The first is the New Jersey Transfer Inheritance Tax which is a tax on the heirs of an estate.  The second is the New Jersey Estate Tax which is a tax upon the estate itself and is based on the size of the estate.  Our previous blog focused on the New Jersey Transfer Inheritance Tax.  This entry reviews the basics of the New Jersey Estate Tax.

The New Jersey Estate Tax originally acted to absorb the maximum credit allowed for estate death taxes under federal law when a federal estate tax was due and owing.  It provided for an estate tax in addition to the inheritance tax in instances in which the inheritance taxes paid to New Jersey and/or any other state, as well as the District of Columbia, were not sufficient to fully absorb the maximum allowable credit for such payments against the federal estate tax upon a New Jersey resident. N.J.S.A. 54:31-1 et.seq.  Like the federal return, the state estate tax return is due within nine months of a decedent’s date of death.

This tax only applied for New Jersey residents. For non-resident and alien decedents, New Jersey merely collects the inheritance tax.

Until 2002, no New Jersey estate tax was due when the aggregate of the inheritance tax paid to New Jersey and the similar taxes paid to other states exceeded the maximum credit allowable under IRC Section 2011(c), which currently is 80%. N.J.A.C. 18:26-3.1(b). Moreover, no tax was due nor was there any requirement to file a New Jersey Estate tax return if a federal return was not required.

However, on July 1, 2002, legislation was enacted to limit the exemption on state estate tax returns.  N.J.S.A. 54:38-1.  The most notable part about this change is that the state unified credit or exemption amount no longer rises in the same manner as the federal credit or exemption.  Effective retroactive to January 1, 2002, the exemption for state estate tax was frozen at $675,000, which was the same level for the state and federal estate tax returns initiated by a death occurring in 2001.

In light of the foregoing, any estate between $675,000 and the federal estate tax exclusion amount (currently $5,340,000) will not have to pay federal estate tax, but will have to file a state estate tax return.  In addition, this tax is considered a lien of unlimited duration against the estate until it is paid.

In short, in 2002, the New Jersey Estate Tax transformed from being a sponge tax to an independent tax.  In planning for and administering an estate, it should not be overlooked.  It should be noted that spouses and Class E beneficiaries are exempt from both federal and state death taxes. Spouses are exempt due to the unlimited marital deduction whereas charities are exempt due to the charitable deduction.

A New Jersey Estate Tax may be assessed those to other Class A beneficiaries which include parents, children and other lineal descendants.  Although such beneficiaries are exempt from the New Jersey inheritance tax, they are still limited by the applicable exclusion amount set forth in federal estate tax system.

The New Jersey estate tax is calculated as follows:

 

AT LEAST

 

BUT LESS THAN

TAX ON AMT IN FIRST COLUMN

 

+ %

 

OF EXCESS

OVER

$0

$615,000

$0

0

$0

$615,000

$667,175

$0

37.0

$615,000

$667,175

$840,000

$19,304

4.8

$667,175

$840,000

$1,040,000

$27,600

5.6

$840,000

$1,040,000

$1,540,000

$38,800

6.4

$1,040,000

$1,540,000

$2,040,000

$70,800

7.2

$1,540,000

$2,040,000

$2,540,000

$106,800

8.0

$2,040,000

$2,540,000

$3,040,000

$146,800

8.8

$2,540,000

$3,040,000

$3,540,000

$190,800

9.6

$3,040,000

$3,540,000

$4,040,000

$238,800

10.4

$3,540,000

$4,040,000

$5,040,000

$290,800

11.2

$4,040,000

$5,040,000

$6,040,000

$402,800

12

$5,040,000

$6,040,000

$7,040,000

$522,800

12.8

$6,040,000

$7,040,000

$8,040,000

$650,800

13.6

$7,040,000

$8,040,000

$9,040,000

$786,800

14.4

$8,040,000

$9,040,000

$10,040,000

$930,800

15.2

$9,040,000

$10,040,000

___________

$1,082,800

16.0

$10,040,000

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