Q. I know the new tax plan isn’t set in stone, but can you explain the proposed changes for the estate tax and what impact that will have on people specifically in New Jersey?
A. You’re right that there are still many unknowns for the tax plan.
We’re barely out of the gate: The U.S. House of Representative’s Committee on Ways and Means released the initial version of the Tax Cuts and Jobs Act. And now the Senate has its own version, too.
That’s just the starting point. Politicians, lobbyists and special interest groups will do all they can to meld the plan into what they want it to be.
So what changes are ahead – for now? We’re going to focus on the House plan.
The tax reform plan proposes significant changes to the federal estate and gift tax system, said Richard Miller, an attorney and chair of the elder law department at Mandelbaum Salsburg in Roseland.
“Under the current law, estates in excess of $5.49 million are subject to federal estate tax at a 40 percent rate,” he said. “Individuals are permitted to make annual gifts of $14,000 per person, which is scheduled to increase to $15,000 in 2018.”
Miller said the current plan increases the federal exemption to $11.2 million per person in 2018, and it would be indexed for inflation until Jan. 1, 2024, when the federal estate tax would be eliminated altogether.
The gift tax would remain in place for transfers that exceed the exemption amount, but beginning in 2023, the highest tax rate for gifts would be reduced from 40 percent to 35 percent.
He said the step-up in basis remains in place, meaning the cost basis of an inherited asset for capital gains purposes is the value as of the decedent’s date of death.
“These changes are far from certain as the proposed legislation is in its preliminary form and must go through multiple steps before being signed into law,” Miller said. “The bill will now be introduced to the full House of Representatives for debate, amendment and approval.”
We’re likely to see modifications to the bill during this process.
Once the bill is approved by the House, it goes to the Senate, where it is reviewed by the Finance Committee.
“The Finance Committee may rewrite the proposal before it is presented to the full Senate,” Miller said before the Senate introduced its own version. “Following Senate approval, the tax bill is sent to a joint committee of House and Senate members who work to create a compromise version, which is then sent to the House and Senate for approval.”
In other words, he said, a lot can happen with the estate and gift tax proposals before the bill is finalized.
It’s important to note that New Jersey has its own estate tax system that is not impacted by the proposed changes to the federal law.
Our state has two types of “death taxes” – the New Jersey estate tax and the New Jersey inheritance tax.
In 2017, estates in excess of $2 million are subject to New Jersey estate tax unless the assets pass to a spouse or domestic partner, Miller said.
“The New Jersey estate tax is scheduled to be eliminated as of Jan. 1, 2018,” Miller said. “It is unclear, however, whether the elimination of the estate tax will be `permanent’ or revisited by the next administration.”
New Jersey also remains one of the few states that imposes an inheritance tax — and this is a tax no one has seriously talked about changing.
The inheritance tax is not based on the size of the estate, but on who receives the estate, Miller said.
He said there is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child, called Class “A” beneficiaries.
But there is an inheritance tax on transfers to siblings, who are Class “C” beneficiaries.
“The first $25,000 passing to each sibling is exempt from tax,” Miller said. “Thereafter, the tax rate is between 11 and 12 percent.”
Inheritance tax is also imposed on nieces, nephews, friends and others, known as Class “D” beneficiaries, at a rate of between 15 and 16 percent.
“While the future of the federal and state estate tax remains unclear, the New Jersey inheritance tax appears likely to remain for the foreseeable future,” Miller said.
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