Taxes are just an obligation most people have to deal with — and that obligation doesn’t end when they die. The executor of your estate may not only have to file your final tax return on your behalf, but your beneficiaries may have an obligation to pay inheritance taxes on any assets that you leave behind.
Understanding as much as you can about how taxes work can help you plan and minimize their impact on your heirs.
How do inheritance and estate taxes differ?
Tax officials may assess an inheritance tax on the assets that you leave to a loved one in your will when you pass away. The rate assessed varies depending on a beneficiary’s relationship to the testator.
An estate tax is different from an inheritance one. Tax officials base their assessment of estate taxes on the estate’s value.
Who assesses an inheritance tax?
While the federal government does not assess an inheritance tax, they do expect anyone who receives withdrawals 401(k)s or individual retirement accounts (IRAs) to report any proceeds as income when filing their taxes. The IRS also expects any beneficiary who receives an income-producing property to report any income they generate on their taxes.
New Jersey is only one of six states that assesses an inheritance tax. The state repealed estate taxes in 2018. States with inheritance taxes in place often only collect inheritance taxes on estates with values over certain thresholds.
What else you should know about inheritance taxes
One detail that you should note is that state revenue officials may only assess inheritance taxes if the decedent previously lived or owned property there.
A beneficiary’s obligation to pay an inheritance tax may also vary depending on their relationship with the decedent. New Jersey doesn’t require surviving spouses, including those who belonged to a domestic partnership, to pay inheritance taxes. Any children or grandchildren in New Jersey are also exempt from the inheritance tax. Inheritance taxes range from 0% to 18% in other instances based on how much a beneficiary inherits.
Understanding how estate and inheritance taxes work in New Jersey isn’t just something that beneficiaries need to know, but testators do as well. This knowledge can aid testators in making better decisions when it comes to estate planning. It can help beneficiaries avoid exposing themselves to legal liability. An elder law attorney can provide you with the necessary guidance on estate tax matters here in East Hanover.