Q: Do you pay tax on an inheritance?

A: New Jersey is one of only three states that has both inheritance and estate taxes. A new Jersey estate tax return must be filed if the decedent's gross estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. It must be filed within nine months of the decedent's death (nine months plus 30 days if the Form 706 method is used). New Jersey imposes a transfer Inheritance Tax, at graduated rates, on property having a total value of $500 of more which passes from a decedent to a beneficiary. Generally, an inheritance tax return must be filed and the tax paid on the transfer of real or personal property withing eight months after the death of a decedent. Property passing to a decedent's surviving spouse, parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax. 

Q: Do you pay tax on inheritance money? If I live in New Jersey and inherit money from a grandfather in Florida, what is the tax rate/percentage that I would have to pay on it? And would we only pay New Jersey an inheritance tax? What about estate taxes for New Jersey and Florida?

A: First, inheritances are not subject to state or federal income taxes. However, they are still subject to inheritance and estate taxes. If your grandfather's estate was worth less than $3.5 million, there is no federal estate tax due. Florida does not have any estate taxes. If your grandfather was a Florida resident, nothing is due to the State of Florida.

New Jersey, on the other hand, has two different "death' taxes. First, the state imposes an estate tax on estates where the total value of all of the assets exceeds $675,000, even though the federal limit is $3,5 million. Currently, there is no New Jersey estate tax on estates of non-residents. It doesn't matter tht the beneficiaries live in New Jersey. If the person who died did not reside in New Jersey, there is no New Jersey estate tax.

But, New Jersey has another way of getting its hands in your pockets. The state has an inheritance tax, the application of which depends on who inherits the property. For example, there is an up to 16 percent inheritance tax on transfers to certain relatives and non-relatives, e.g. a niece or nephew, a friend or a son-in-law. If the person who died was a New Jersey resident, then it does not matter what type of property is transferred to such relative. But in your case, there are two independent reasons why there is not tax. First, if the person who died was a non-resident of New Jersey, then the New Jersey inheritance tax only applies to transfers of real estate and tangible personal property such as furniture or furnishing located in New Jersey. Since this is cash, there is not tax. Secondly, because the transfer is to a direct descendant (grandson), there would be no inheritance tax anyway.

Q: Should I convert to Roth IRA in 2010?

A: Estate planning amidst an uncertain future for transfer taxes (click here to read the article)

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