The State of New Jersey, home of low gas taxes, is increasing that tax to fund the state’s Transportation Trust Fund. As a trade-off, the estate tax is being phased out. But, that’s not the whole story.
What is changing:
- The tax on gasoline sold in the state is increasing by 23 cents from the current rate of 14.50 cents per gallon effective 11/1.
- The sales tax is being reduced from 7% to 6.875% as of 1/1/17 and to 6.625% as of 1/1/18
- The gross income tax exclusion on pension and retirement income is being increased over four years (from 2017 to 2020) to $100,000 for joint filers, $75,000 for individuals and $50,000 for married/filing separately.
- The estate tax is being phased out over the next 15 months, with the current $675,000 threshold being replaced with a $2 million exclusion after January 1, 2017 and the estate tax being eliminated altogether as of January 1, 2018.
- There are also savings for veterans and the working poor.
What isn’t changing:
New Jersey is one of only two states (Maryland is the other) that has both an estate tax and an inheritance tax. The inheritance tax is NOT eliminated by this legislation.
How does the inheritance tax work?
The state levies a tax on bequests to siblings and sons- and daughters-in-law to the extent they exceed $25,000, and transfers to other relatives and friends if they exceed $500. The inheritance tax rates range from 11 percent to 16 percent.
The inheritance tax frequently becomes an issue in transfers of interests in family owned businesses among siblings since there is no credit for previous inheritance taxes paid on the same interest.
Why eliminate the estate tax but not the inheritance tax? The state has a serious revenue shortage and simply can’t afford to give up a tax that generates over $300 million per year.
What should you do?
- Consider creating gifts to family members before death in lieu of bequests which may be taxable.
- Defer taking discretionary retirement distributions to qualify for the increased exclusion.
- Look at the implications of buy/sell agreements for family businesses.
- Review all your estate planning documents in light of the new provisions (always a good idea whenever the law changes).
- If you are receiving pension income, consider adjustments to your state estimated taxes.
As always, your Friedman LLP tax professional is available to help you navigate these changes.