The Three 'Death' Taxes
February 10, 2005
There are three separate "death" taxes that may potentially apply to your estate:
- The federal estate tax:
The federal estate tax is based on the size of your estate. All assets, including life insurance, retirement plans, your home, jewelry, collectibles, et cetera, count. There is an unlimited marital deduction so there will be no federal estate tax on your death if you leave everything to a surviving spouse (domestic partners are not considered spouses under federal law). Assets passing to charity are also exempt from the federal estate tax. There is also a $1,500,000 exemption for property passing other than to a surviving spouse or charity. That exemption increases in several steps through 2009. There is no federal estate tax in 2010. The estate tax exemption in 2011 and beyond is $1,000,000.]
- The New Jersey estate tax:
Before tax law changes in 2001, New Jersey's estate tax was equal to the maximum allowable state death tax credit under federal law (reduced by any New Jersey Inheritance Taxes, discussed below). The credit against federal estate taxes was for any state death taxes that were paid by a decedent's estate or heirs up to a maximum amount. For example, if you had a $1,000,000 estate, the federal estate tax would have been $125,250, and the maximum state death tax credit was $33,200. Therefore, instead of writing a check to the Internal Revenue Service for $125,250, you would pay $92,050 to the IRS and $33,200 to New Jersey. The federal tax law changes removed the state death tax credit, therefore, under New Jersey's formula, the New Jersey estate tax was reduced to zero. Faced with this loss of revenue, New Jersey (and almost every other state) changed the state estate tax. New Jersey now imposes an estate tax equal to the federal state death tax credit under the federal estate tax law as it existed in 2001, when the federal estate tax exemption was $675,000. In rough terms, this means that there is a New Jersey estate tax of approximately 10% on all estates over $675,000 (after applying the marital and charitable deductions). There may be a New Jersey estate tax on the death of a domestic partner even if the entire estate is left to the surviving domestic partner since there is no federal marital deduction for domestic partners.
- The New Jersey Inheritance tax:
The New Jersey Inheritance tax is based on the relationship between the decedent and the person inheriting assets from the decedent. There is no tax on property passing to parents, spouses, domestic partners, children and other lineal descendants. There is also no tax on assets passing to charities. Siblings, daughters-in-law and sons-in-law have a $25,000 exemption. Above that amount, the tax rate starts at 11% and goes up to 17%. For property left to anyone else, if it is less than $500 there is no tax. If they are left more than $500 the entire amount is taxed at rates starting at 15% and going up to 16%. For example, a friend inheriting $499 receives $499 (no tax). A friend inheriting $500 receives $425 ($500 times 15% equals $75 tax).