Receiving an inheritance is a mixed blessing. While it’s usually a financial windfall, an inheritance usually means that you’ve lost a loved one, which is a difficult situation. Plus, getting an inheritance can be financially complex, particularly if you need to pay any associated taxes. If you’re in New Jersey and have an inheritance coming your way, you may be wondering whether you’ll owe taxes and if so, how much you’ll have to pay. If so, here’s what you need to know about the NJ inheritance tax.
What Is the NJ Inheritance Tax?
An inheritance tax is a financial obligation imposed by specific states, including New Jersey. Inheritance taxes differ from estate taxes. With an estate tax, the taxes are owed by the deceased’s estate and are paid from it before any funds or assets go to heirs. With an inheritance tax, the money owed to the state government is paid by the recipient of the inheritance directly.
As of 2023, only six states have an inheritance tax, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In New Jersey, inheritance taxes are based on the total value of any taxable received assets. However, not all types of beneficiaries may owe inheritance taxes, and some may pay lower rates than others.
Who Pays an Inheritance Tax in New Jersey?
First, it’s critical to note that the NJ inheritance tax applies to residents of New Jersey. It also applies to non-residents who have real or personal tangible property in the state, such as rental properties, vacation homes, or any movable property. In those cases, the heir is considered domiciled in the state and typically owes the inheritance taxes. If neither of those applies, the inheritor typically won’t owe the NJ inheritance tax, regardless of their relationship to the deceased.
In most cases, spouses, children, parents, grandparents, stepchildren, or stepparents of the deceased do not owe any inheritance taxes in New Jersey. The same is true of any assets directed toward tax-exempt organizations – such as applicable religious organizations, educational institutions, or nonprofits – or government agencies. However, most other heirs do owe inheritance taxes.
For example, siblings of the deceased or the spouses of any of the deceased’s children owe inheritance taxes, though they’re taxed at a lower rate. These heirs are considered Class C under the New Jersey tax code.
Any other beneficiaries, including those with or without a familial relationship, are taxed at the highest rate. These heirs are Class D.
It is important to note that there’s also an exemption threshold in New Jersey. As a result, the first $25,000 in asset value isn’t subject to the NJ inheritance tax if the heir is Class C. Additionally, all life insurance proceeds are automatically exempt, regardless of the amount.
How Much Is the NJ Inheritance Tax?
In New Jersey, the inheritance tax ranges from 0 to 16 percent. For those that owe taxes, their classification and the total amount owed determine the rate. Inheritance taxes in New Jersey work like federal income taxes, as the state uses a bracketed structure.
For Class C inheritors, the rates are:
- $0.01 to $25,000 – 0%
- $25,001 to $1,100,000 – 11%
- $1,100,000.01 to $1,400,000– 13%
- $1,400,000.01 to $1,700,000 – 16%
- $1,700,000.01+ – 16%
For Class D inheritors, the rates are:
- $0.01 to $700,000 – 15%
- $700,000.01+ – 16%
How Do You Pay Taxes on an Inheritance in New Jersey?
If you owe inheritance taxes in New Jersey, you need to pay the required amount within eight months of the death. If you don’t, you’re subject to a 10 percent annual interest charge on any unpaid taxes, which can add up fast.
Fortunately, it’s possible to pay a NJ inheritance tax online. The New Jersey Inheritance and Estate Tax Office online portal lets you pay by credit card or e-check, making it simple. However, you can also pay by phone if you prefer or handle it by mail, including when you file your return or separate from a return.
Do you have any tips that can help someone navigate the NJ inheritance tax? Have you dealt with the NJ inheritance tax and want to tell others about your experience or any lessons you learned along the way? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.