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Federal & State Tax Exemption

Federal Gift and Estate Tax Exemptions

The federal estate tax exemption is the amount you can pass free of estate tax to your heirs. In addition, there is an unlimited "marital deduction" so that an unlimited amount can be left to a spouse without any estate tax. Because of the temporary nature of current federal estate tax law, there is much uncertainty in the federal estate taxation of estates. This is where Whitlock Canter LLC of Paramus, New Jersey can help. The following is a schedule of the federal estate tax exemption based upon the year of death:

2006$2 million
2007$2 million
2008$2 million
2009$3.5 million
2010Federal estate tax repealed unlimited exemption with limited step-up in basis(election due 1/17/12) or $5 million with unlimited step-up in basis
2011 & 2012$5 million with portability of spouse's unused exemption
2013 & after$1 million

 

The federal estate tax laws are coordinated with the federal gift tax laws. An unlimited amount can be given to a spouse during life or at death. The first $13,000 given to each person in each calendar year (referred to as an "annual exclusion") does not reduce a person's lifetime $5 million gift tax exemption. In addition, for married couples gifts can be "split" and treated as being made one-half (1/2) by each spouse ; thus increasing the "annual exclusion" to $26,000 per year per donee. If the annual exclusion amounts are exceeded, a person begins to erode his or her $5 million lifetime gift tax exemption. If the $5 million lifetime gift tax exemption is exceeded a federal gift tax of 35% is applicable on the excess over $5 million. Any portion of the gift tax exemption used during a person's lifetime reduces the estate tax exemption remaining at death. For example, if a single person made a gift of $413,000 to his son in 2011 and then died in 2012, the first $13,000 would be treated as an annual gift tax exclusion, and the remaining $400,000 would reduce the remaining gift tax exemption from $5 million to $4,600,000. When he died in 2012, $4,600,000 of estate tax exemption would remain.

For the years 2011 and 2012 there is portability of federal estate tax exemption between spouses. This means that upon death a spouse can pass his or her unused exemption to his surviving spouse. This is accomplished by filing a federal estate tax return reporting the amount of unused exemption remaining.

State Estate Tax Exemption

Prior to 2001 all 50 states had the same estate tax exemption. In 2001, the federal law phased out the credit for state estate tax exemptions and instead allowed a deduction for state estate taxes paid. Several of the States reacted to this change in the law and now the amount of estate tax applicable depends upon the state a person resides in at the time of their death.

In New Jersey, the estate exemption is $675,000. The tax rate is not a fixed percentage. The rate varies depending upon the size of the estate. Like the federal estate tax law, the New Jersey estate tax law allows an unlimited marital deduction for assets left to a spouse. However, the New Jersey estate tax is $33,200 on $1 million left to non-spouse heirs, $66,400 on $1.5 million, and $99,600 on $2 million. The top rate reaches 16%. New Jersey allows a "New Jersey Only QTIP election" for marital trusts if a federal estate tax return is not filed or a federal estate tax return is filed and there is also a valid federal marital deduction election made that needed to be made to reduce the federal estate tax.

The New York estate tax exemption is $1 million; with rates the same as New Jersey. Florida and Delaware are among the 34 states that no longer have any state estate tax; making it a popular destination for retirement.

New Jersey Inheritance Tax Laws

New Jersey is one of only 10 states that impose an inheritance tax based upon the relationship of the person who dies (the Decedent) to the persons who inherit (the heirs or beneficiaries).

The following is a chart indicating the New Jersey Inheritance Tax Rates based upon the relationship of the heir to the Decedent:

HeirRate
Spouses, children, parents,grandchildren, other lineal descendants and charitiesExempt
Brothers, Sisters, Wife or widow of a son, Or husband or widower of a daughter

First $25,000 is exempt 11% $25,000 to $1.1 million

13% $1.1 million to $1.4 million

14% $1.4 million to $1.7 million

16% over $1.7 million

All others

First $499 is exempt

15% up to $700,000

16% over $700,000