Will you need to pay inheritance tax?

When a person passes away and leaves behind assets set aside for family members, friends and charitable organizations, some of these beneficiaries may have to pay taxes on the value of whatever it is that they received. This is an inheritance tax -- which is not the same as estate taxes. New Jersey no longer collects estate taxes, but the federal government does.

New Jersey is one of six states that collects an inheritance tax, so how it works is not widely known. Some states have set a single inheritance tax rate. That is not the case here, which is one reason why this whole thing is confusing to so many.

Inheritance tax basics

Not all beneficiaries have to pay taxes on the property they inherit. Those who are exempt from paying these taxes include:

  • Spouses
  • Children
  • Grandchildren
  • Domestic partners
  • Parents
  • Grandparents
  • Charities
  • Religious institutions
  • Educational institutions
  • Non-profits

The state considers the family members Class A beneficiaries, while the organizations listed fall into the Class E beneficiary category. There are two other beneficiary classes: C and D. Those in these classes may have to pay inheritance taxes when the property value reaches a certain amount. For example, Class C beneficiaries only need to pay taxes on inheritances that value more than $25,000.

Tax rates

As previously stated, New Jersey does not have just one inheritance tax rate. The state's rates currently stand between 11 percent and 16 percent. The rate at which the government taxes your inheritance depends on your relation to the deceased and the value of the property received. Tax rates are subject to change from year to year.

Big business for the state

In the year 2017, the state received a total of 6,059 inheritance tax returns. Of those, nearly 4,500 were actually taxable. That same year, the state collected over $354 million in inheritance taxes. The average amount owed per taxee came to just under $80,000. It is big business for the state, so it is a tax law that is not likely to go away anytime soon.

If you stand to inherit property from someone's estate, seeking help with the inheritance tax is wise. You may not have to pay this tax at all, but it is good to make sure you do your research so that you do not get slapped with penalties and additional taxes for not paying on time if it turns out you do have to pay.

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