How are taxes handled in New Jersey Probate? When it comes to federal and state tax purposes, two events get set in motion: it puts an end to the decedent's last tax year when it comes to filing an income tax return, and it establishment of an estate occurs. The estate itself is then taxed.
Let's separate the federal and state for a minute and breifly explain what has to be done in order to fullfil any tax burden. For federal purposes, a few forms must be completed and filed, dependent on the decedent's income, the size of the estate and the income of the estate:
- Final Form 1040 Federal income Tax Return
- Form 1041 Federal Fiduciary Income Tax returns for the estate
- Form 709 Federal Gift Tax return
- Form 706 Federal Estate Tax return
The federal estate tax is based on the value of the estate's assets less liabilities. It's not that easy however because you'll have to take into concideration any exceptions…
Exception #1: Unlimited Marital Deduction. All of the assets left to a surviving spouse are exempt from federal estate tax
Exception #2: Estate and Gift Tax Exclusions. The estate tax applicable exclusion permits a transfer up to $3.5 million at your death to anyone without incurring an estate tax. Note: in 2010 there will be a 1 year repeal on the estate tax. In 2011 and beyond, estates will be subject to estate tax at a top rate of 55% with only a $1 million exemption available.
Exception #3: Qualified Charitable Donations. Assets passed to charity are exempt from estate tax.
Exception #4: Federal Gift Tax Applicable Exclusion. Fixed at $1 million and permits a transfer to anyone during a lifetime without incurring a gift tax. Any gift amount will then be subtracted from the allowable $3.5 million exemption at death. Meaning, if you give a $1 million gift to your best friend, $2.5 million will remain of your exemption at death.
Now let's take a look at State Taxes. The Personal representative must file the appropriate state income tax return for the deceased and any state income tax returns for the estate during the probate period. That is not all however, the PR must also make sure to pay any local real estate tax, personal property tax, business tax and any unresolved tax issues related to prior year tax returns.
State Estate Tax
Under New Jersey Law, there is an estate tax on assets anything passed to someone other than a spouse in excess of $675,000. The rates will vary from 4.8% to 16% with the first $52,174 taxed at 37%.
State Inheritance tax
New Jersey inheritance tax is broken up depending on who the beneficiary is. Below is an explanation of the rates at which someone will be taxed.
- Spouse, child, grandchild or parent. Any inheritance passing to a spouse, child, grandchild or parent is completely exempt from the New Jersey inheritance tax. These persons are considered “Class A” beneficiaries.
- Siblings. Inheritances passing to a brother or sister are exempt for the first $25,000 to each such brother or sister. These persons are considered “Class C” beneficiaries. Thereafter, a tax of 11 percent is imposed. After the total amount exceeds $1.1 million, the tax is 13 percent.
- Charities. Anything left to a charity is exempt from New Jersey inheritance tax. Charities are considered “Class E” beneficiaries.
- All others. All other relatives, or to non-related persons are considered “Class D” beneficiaries, and their inheritances will be subject to a New Jersey tax of at least fifteen percent. If the value of the inheritance is less than $100, no tax will be due. However, for inheritances worth more than $100, there is no exemption.
If the beneficiaries are subject to New Jersey inheritance tax, they have to file an inheritance tax return. The due date for New Jersey inheritance tax is 8 months from death. If the decedent was a resident of New Jersey, Form IT-R should be used, and if the decedent was not a resident, then Form IT-NR should be used. If the beneficiaries, being the immediate relatives, are exempted from the inheritance tax, they don't have to file an inheritance tax return. They will have to use Form L-8 in order to release bank accounts, stocks, bonds etc, and Form L-9 in order to release the State's lien on real property. Before transferring the assets like real estate or stocks, the beneficiary has to obtain a written consent from the Director of the New Jersey Division of Taxation. This waiver, which doesn't apply when Forms L-8 and L-9 are not applicable, is not granted until the beneficiary pays the inheritance tax. The due date to pay inheritance tax in New Jersey is 8 months after the death of the individual whose estate will be passed on to the heir. Tax debt, if any, after the due date will be subject to interest.
State Gift Tax
New Jersey does not impose a separate gift tax.
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