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New Jersey's Estate Taxes and How They Can Affect You and Your Family

Information about estate taxes, labeled by critics as "death taxes," has become very confusing. Changes in the federal tax laws and misinformation are the primary causes. To complicate matters, in New Jersey there is an "inheritance tax" or, under certain circumstances, an estate tax.

"To start, you need to consider the effects of both the federal and the state tax laws," says Jerome M. Newler, CPA, of J M Newler CPA & Co. in Springfield. "When I work with a client, I lay it all out. 'On the federal side, here's what you can expect. Here's the state side and what to expect there.'"

In calculating New Jersey's inheritance tax, beneficiaries are divided into four different categories. Property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax. While it doesn't affect bequests to direct family members, it may apply to bequests - even small ones - to other "classes" of beneficiaries. And Newler recommends that a couple should be sure to "balance" their property holdings. Having all of a family's holdings only in one of the spouses' name, for example, may cause problems for the estate.

Business owners need to understand one important fact, "Some owners think - well if I've passed away, the business is worth less. But for tax purposes, the value of the business is calculated for the day before you die," Newler advises.

In general, the federal estate tax only applies to very large estates. New Jersey's estate tax, however, is based on the provisions of the Internal Revenue Service code in effect on December 31, 2001. According to the New Jersey Department of the Treasury, a New Jersey estate tax return must be filed if the decedent's gross estate as determined in accordance with the provisions exceeds $675,000. New Jersey's inheritance tax can apply to any estate - it varies based on who receives a bequest from an estate.

In New Jersey, anyone with an ownership interest in a valuable property - real estate, a business, even something like a valuable art collection - needs to be aware of estate tax issues. The following information from the New Jersey Society of Certified Public Accountants (NJSCPA) gives an overview of how the federal tax is currently structured:

An Estate's Net Value
An estate is required to pay federal estate taxes if the taxable estate exceeds the exemption amount set by Congress. The value of an estate is determined by totaling the fair market value of all the property you own at death, including cash, investments, your home and other real estate, business interests, retirement plan assets, as well as death benefits from your life insurance that are paid to your estate because your beneficiary designations are out of date.

From its total assets, your estate gets to deduct money owed, for example, your mortgage balance, funeral and burial expenses, money paid to the executor and other professionals for settling the estate and charitable deductions that are part of your estate settlement. In addition, your estate also gets a "marital deduction" for property passing to your surviving spouse.

Applicable Credit Amount Reduces Estate Tax Bill
Not all estates have to pay any estate tax. Taxes are only paid on estates exceeding the estate tax exemption. For 2006, the federal estate tax exemption amount is $2 million per individual. That means only those who die leaving a net taxable estate of more than $2 million are subject to federal estate tax. This exemption amount increases to $3.5 million in 2009.

In 2010, the estate tax is scheduled to be fully repealed but only for one year. Under the sunset provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, in 2011, the federal estate tax exemption amount reverts back to $1 million, unless Congress enacts further legislation before then.

The Unlimited Marital Deduction
A married taxpayer is allowed to pass an unlimited amount to his or her spouse free of estate tax. (This rule does not apply if the spouse is not a U.S. citizen.) The unlimited marital deduction can be a good way to reduce your current estate tax liability, although it may mean a larger estate tax bill in the future because it will increase the estate of the surviving spouse.

If you leave everything to your spouse using the unlimited marital deduction, no federal estate tax will be levied at your death. However, when your spouse dies, the assets of the entire marriage are included in his/her taxable estate, but only one exemption amount is available for your spouse to use to offset estate taxes. Even though you never used it, your exemption amount cannot be applied to your spouse's taxable estate.

  Estate Planning Terms You Need to Know

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