Does NJ Have Inheritance Tax? What You Need to Know

New Jersey is one of the few states that still imposes an inheritance tax, meaning certain heirs may owe taxes on what they receive from a deceased person’s estate. This tax is separate from the state’s estate tax, which was eliminated in 2018. Understanding who is liable and how much they might owe can help beneficiaries plan accordingly.

Several factors determine whether inheritance tax applies, including the beneficiary’s relationship to the deceased and the value of their inheritance. Knowing the rules on exemptions, tax rates, and filing requirements is essential.

Liability Criteria

New Jersey’s inheritance tax is based on the recipient’s relationship to the deceased and the total value of the assets they receive. The tax is levied on the beneficiary, not the estate, meaning individuals inheriting property, money, or other assets must pay it directly. It is calculated separately for each inheritor rather than on the estate as a whole.

If an inheritance falls below a certain amount, no tax is due. Once it exceeds that threshold, a progressive tax rate applies, meaning larger inheritances are taxed at higher rates. The specific brackets and rates are set by state law.

Certain assets impact tax liability. Real estate, bank accounts, stocks, and other financial instruments are generally taxable, but life insurance proceeds paid directly to a named beneficiary are exempt. Jointly owned property is taxed based on the deceased’s ownership percentage.

Classes of Beneficiaries

New Jersey categorizes beneficiaries into different classes based on their relationship to the deceased, which determines whether an inheritance is taxable and the applicable rate.

Immediate Family

Class A beneficiaries include spouses, children, grandchildren, parents, and grandparents. Under New Jersey law (N.J.S.A. 54:34-2), they are fully exempt from inheritance tax, regardless of the amount received. This exemption applies to biological and legally adopted children, as well as stepchildren. However, step-grandchildren do not qualify for Class A status and may be taxed under a different classification.

Spouses are exempt, but domestic partners must be registered under New Jersey law to receive the same treatment. If a domestic partnership is not legally recognized, the surviving partner may fall into a taxable category.

Extended Family

Class C beneficiaries include siblings, as well as the deceased’s son-in-law and daughter-in-law. The first $25,000 of their inheritance is exempt. Amounts above this threshold are taxed at the following rates:

– 11% on amounts between $25,001 and $1,100,000
– 13% on amounts between $1,100,001 and $1,400,000
– 14% on amounts between $1,400,001 and $1,700,000
– 16% on amounts exceeding $1,700,000

For example, if a sibling inherits $100,000, the first $25,000 is exempt, leaving $75,000 subject to tax. At 11%, the tax liability is $8,250.

Others

Class D beneficiaries include nieces, nephews, cousins, friends, and non-relatives. They do not receive any exemption and are taxed on the full amount of their inheritance at the following rates:

– 15% on amounts up to $700,000
– 16% on amounts exceeding $700,000

For instance, if a friend inherits $500,000, the entire amount is taxed at 15%, resulting in a tax bill of $75,000. If the inheritance is $1,000,000, the first $700,000 is taxed at 15% ($105,000), and the remaining $300,000 at 16% ($48,000), for a total tax liability of $153,000.

Class E beneficiaries, which include charitable organizations, religious institutions, and certain government entities, are fully exempt from inheritance tax under N.J.S.A. 54:34-4.

Exemptions

Certain transfers of assets are not subject to New Jersey’s inheritance tax. Bequests to nonprofit organizations, educational institutions, and government entities are fully exempt, provided they are recognized under federal and state tax laws.

Life insurance proceeds paid directly to a named beneficiary are also exempt. However, if the proceeds are payable to the estate rather than an individual, they may be included in the estate’s taxable assets.

Transfers made more than three years before the decedent’s passing are generally not subject to inheritance tax. However, gifts made within three years of death are presumed to have been made in contemplation of death and may still be taxable unless proven otherwise.

Tax Calculations

The amount owed depends on the taxable value of the assets received and the applicable tax rate for the beneficiary’s classification. Since the tax applies to individual inheritances rather than the estate as a whole, each recipient’s liability must be calculated separately.

Real estate is typically assessed at its fair market value on the date of death, though a beneficiary may opt for an alternate valuation date under N.J.A.C. 18:26-8.10 if it results in a lower taxable amount. Financial assets such as stocks and bonds are valued based on their closing price on the date of death, while closely held business interests may require an appraisal.

Deductions can reduce the taxable amount before applying the appropriate rate. Funeral expenses, outstanding debts, and certain administration costs are allowable deductions under N.J.S.A. 54:34-5. For example, if a beneficiary inherits $500,000 but deducts $50,000 in funeral costs and debts, their taxable amount decreases to $450,000.

Filing Requirements

Beneficiaries who owe inheritance tax must file a return with the state’s Division of Taxation. The return must detail the assets received, their valuation, and the applicable tax rate based on the recipient’s classification.

New Jersey provides Form IT-R for resident decedents and Form IT-NR for nonresident decedents with taxable New Jersey property. These forms must be submitted within eight months of the decedent’s date of death. Late filings can result in penalties and interest charges.

Certain assets require a tax waiver before they can be transferred. Banks, brokerage firms, and real estate transactions often require proof that inheritance tax has been settled. The state automatically issues waivers for Class A beneficiaries, but Class C and Class D recipients must file Form L-9 or Form L-9NR to obtain one.

Late Payment Ramifications

Failing to pay New Jersey’s inheritance tax on time can lead to financial penalties and interest accrual. If the tax is not paid within the required eight-month period, interest begins accruing at 10% per year on any unpaid balance.

The state does not grant extensions for payment, though an extension for filing the return may be requested. Even if an extension is approved, interest will still accumulate on any outstanding tax liability.

In cases of prolonged nonpayment, the state may take legal action to collect the debt, including placing a lien on inherited real estate or other assets. Financial institutions may also refuse to release funds from a decedent’s account if a tax waiver has not been obtained. Beneficiaries who fail to resolve their tax obligations may face collection efforts from the Division of Taxation, including wage garnishment or asset seizure in extreme cases.