Some states, including New Jersey and Pennsylvania, have an inheritance tax. Other states, like Florida and New York, do not have an inheritance tax. An inheritance tax is a tax on the person who receives money from a decedent.
The inheritance tax rate itself depends upon the relationship between the person receiving the money and decedent. For example:
- In both New Jersey and Pennsylvania, if the person receiving the money is a spouse (or a charity), there is no tax.
- If the person receiving money is a sibling, there is a flat 12% tax in PA. In NJ it is a bit more complicated – the first $25,000 is exempt; beyond that there is a tax of 11-16% depending upon on the amount of the bequest.
- Generally, if the person receiving money is anyone else (besides a child, parent or same sex partner), then there is a 15% flat Pennsylvania inheritance tax and a 15 or 16% New Jersey inheritance tax depending upon the amount of the bequest.
- The first BIG DIFFERENCE is that Pennsylvania taxes bequests to all lineal descendants and certain lineal ascendants at 4.5%. New Jersey does not charge an inheritance tax to any lineal descendants or ascendants. (Note: Pennsylvania does not charge a tax on the bequest to a parent if the decedent was under 22 years of age.)
- The second BIG DIFFERENCE is that Pennsylvania has a 15% inheritance tax on bequests to a same sex partner. In New Jersey, as long as the partners are in a civil union or domestic partnership, there is zero inheritance tax. If the partners are not in a civil union or domestic partnership, then there is a 15 or 16% tax, depending upon the amount of the bequest. For more information, see my blog on Estate Planning for Same Sex Couples.
- In NJ, a bequest to a son-in-law or a daughter-in-law is taxed at the same rate as a bequest to a sibling. N.J.S.A. Section 54:34-2c. In PA, such transfers are taxed at the same rate as a bequest to a child. 72 PS 9116 (Note: If the son-in-law or daughter-in-law later remarries, this does not apply.)
- In both NJ and PA, step children and adopted children are taxed in the same manner as natural children. New Jersey also allows inheritance tax free transfers to mutually acknowledged children in certain circumstances. N.J.S.A. Section 54:34-2a.
- The only other significant difference in the rates is that New Jersey exempts transfers that are less than $500. Pennsylvania exempts certain transfers of up to $3,000.
New Jersey and Pennsylvania also have similarities and differences between the types of assets that they will tax.
This is not a complete list, but as an example:
- Neither state taxes life insurance, real property located outside of the state or business interests located outside of the state;
- Both states will fully tax cash and brokerage assets of individuals who died while domiciled in their state.
- Both states will fully tax real estate and business interests located inside the state of resident and non-resident domiciliaries.
- Joint property held with rights of survivorship are fully taxed in New Jersey unless the recipient can prove he or she contributed to the joint property. In Pennsylvania, only the portion of the property owned by the decedent is taxed.
- IRAs, Annuities, 401(k)s, 403(b)s and other retirement assets are taxed in New Jersey, but not in Pennsylvania, provided the account owner passes away before having the right to withdraw the money free of penalty (generally before retirement age of 59.5) AND provided that a person was named as beneficiary of the retirement plan. In PA, if the owner of the 401(k) has the right to close down the account it will also be subject to a tax, this is generally age 62 or 65.
- Retirement plans, annuities and other benefits payable by the federal government to a beneficiary are not subject to an inheritance tax in NJ or PA.
- In Pennsylvania, transfers made within one year of death are taxable, but each such transfer is subject to a credit of up to $3,000 per recipient. In New Jersey, transfers “made in contemplation of death” are taxable for inheritance tax purposes. There is a presumption that transfers made within three years of death are made “in contemplation of death”.
Note: An inheritance tax is not to be confused with an estate tax. A state can have either an inheritance or an estate tax, both, or neither. Additionally, many of the assets that are exempt from inheritance tax (such as life insurance) are subject to an estate tax.
The NJ inheritance tax is due within 8 months from the date of death. In PA, the inheritance tax is due within 9 months of the date of death, but there is a 5% discount if the tax is paid within 3 months from the date of death.
The NJ Inheritance tax statute can be found at N.J.S.A Section 54:34-1, et. seq. The PA Inheritance tax statute can be found at 72 PS 9101, et. seq.
Edited on January 20, 2011 thanks to input from Patricia Picardi.