The federal estate tax can have a significant impact on your legacy because it carries a 40 percent top rate. Fortunately, you can transfer a certain amount tax-free before the estate tax becomes applicable. This figure is called the estate tax exclusion.
It is increased every year to account for inflation, and it is at a record high at the moment in 2024. However, changes are brewing, and we look at the matter of New Jersey estate taxes from an overview in this post.
The Road to the Historically High Level
When you examine recent history, you can see that the estate tax exclusion has dramatically increased in a relatively short period of time. In 2001, the exclusion was just $675,000, and the top rate was 55 percent. It went up to $1 million the following year with a 50 percent max rate.
Over the next two years, it was $1.5 million, and the exclusion was $2 million from 2006 through 2008. In 2009, there was a $3.5 million exclusion and a 45 percent maximum rate.
The Bush tax cuts included a complete repeal of the federal estate tax for 2010, but the legislative measure was scheduled to sunset at the end of that year. If nothing was done in the meantime, the exclusion was going to go back down to $1 million with a 50 percent rate.
A lot of people got a break when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted at the 11th hour. It set the estate tax exclusion at $5 million for 2011, and the reduction in the rate to 35 percent was another positive for high-net-worth individuals.
This arrangement remained in place until the American Taxpayer Relief Act of 2012 increased the top rate to 40 percent, but the $5 million exclusion adjusted for inflation was retained.
Tax Cuts and Jobs Act
It stood this way through 2017, and at the end of that year, the Tax Cuts and Jobs Act was enacted. This legislative measure essentially doubled the exclusion to a record high of $11.18 million for the 2018 calendar year, and the 40 percent rate remained constant.
There have been inflation adjustments since then, and in 2024, the exclusion stands at $13.61 million. It will state at the same level next year indexed for inflation.
Expiration of Tax Cuts and Jobs Act
The aforementioned Tax Cuts and Jobs Act will sunset at the end of 2025, and at that time, the exclusion will go back down to $5.49 million in 2017 dollars adjusted for inflation.
A new tax law can be passed in the meantime that can completely change the playing field, and this is entirely possible since we are in an election year. However, if you are exposed to the federal estate tax as it sits today, you should consider taking advantage of the exclusion while it is at a record high, and we can explain how.
Federal Gift Tax
We have a federal gift tax that exists to prevent people from giving gifts to avoid the estate tax, and it has been in place continuously since 1932. It was unified with the estate tax during the 1970s, so the exclusion is a unified exclusion that includes large lifetime gifts.
There is a separate gift tax exclusion that can be used to give up to $18,000 to an unlimited number of individual gift recipients in a calendar year tax-free. You would be using a portion of your unified lifetime exclusion to give a tax-free gift that exceeds this amount to any one person in a given year.
In addition to the annual exclusion, there are two other ways to help out others without incurring any gift tax liability.
There is an educational exclusion that can be used to pay school tuition for students in a tax-free manner. It does not apply to books, fees, and living expenses, but you could use your $18,000 per person annual exclusion to provide added support.
Plus, if you are married, you and your spouse would each have $18,000 exclusions. With this in mind, you could combine forces and give $36,000 annually to a student or anyone else for that matter.
The other gift tax exclusion is a medical exemption. If you want to pay medical bills or health insurance premiums for someone else, you would not be giving a taxable gift.
New Jersey Inheritance Tax
An inheritance tax and estate tax are forms of taxation with two different structures. Estate taxes are levied on the entirety of the taxable portion of an estate before it is distributed to the beneficiaries.
With inheritance tax, the distributions to each individual inheritor can be taxed when a single estate is being administered. There is no federal inheritance tax, but there are six states with state-level inheritance taxes.
As luck would have it, New Jersey is one of these six states. That’s the bad news, but the good news is that Class A beneficiaries are exempt. These are spouses, grandparents, parents, children, stepchildren, and grandchildren.
State-Level Estate Taxes
There are twelve states in the union that have state-level estate taxes. Fortunately, there is no estate tax in New Jersey, but this does not necessarily mean that you should not be concerned about these taxes.
If you own property in a state that has an estate tax, it would apply to the transfer of the property in that state. Most of the states with estate taxes are in the Northeast, including New York, Connecticut, and Maryland, and the District of Columbia has an estate tax.
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Our doors are open if you’re ready to cut to the chase and work with a Warren, NJ estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 908-222-8803.
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