16 Jun My sister lived in N.J. Do I owe tax on her inheritance to me?

Q. I live and work in New York and I just inherited my sister’s TIAA retirement annuity account. She lived in New Jersey until her death last year, but also worked in New York. I took the distribution and had federal and New York tax withheld and received a 1099-R. Also, is this inheritance subject to inheritance tax in New Jersey also?
— Confused

A. Condolences on your sister’s passing.

It sounds like you liquidated the TIAA retirement annuity you inherited from your sister and took a total distribution.

Typically, these accounts consist entirely of pre-tax contributions and tax-deferred earnings, so the entire distribution is taxable federally and in your state of residence, which is New York, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

As such, it sounds like the withholding tax was done correctly, Novick said.

“Whether the amount of withholding tax is equal to the amount of the tax due on the distribution will depend on your other income and withholding taxes or estimated tax payments during the year,” he said. “New Jersey income tax does not apply to the distribution to you.”

However, he said, the amount you inherited from your sister, including the TIAA retirement annuity, will be subject to New Jersey inheritance tax because your sister was a New Jersey resident at the time of her death, Novick said.

The tax rate depends on the inheritor’s relationship to the deceased and New Jersey law categorizes relationships into four categories:
· Class A, which covers a spouse, domestic partner, civil union partner, parent or grandparent, child, stepchild, or grandchild;
· Class C, which includes a brother or sister, spouse or civil union partner of the deceased person’s child, surviving spouse or civil union partner of the deceased person’s child;
· Class D: Everyone else
· Class E: State of New Jersey and most charities/non-profits.

Classes A and E are exempt from the inheritance tax, Novick said.

For a Class C beneficiary, the first $25,000 of property inherited is exempt, but additional amounts are taxed at 11% up to $1.075 million, with rates ranging from 13 to 16% on higher amounts, Novick said.

Class D inheritances are taxed at 15 to 16% depending on the transferred amount. Note that the Class B category was eliminated.

“The taxes are owed by the person who inherits the property, unless there are special provisions in the will, if any, shifting that burden to someone else,” Novick said. “Thus, if the amount you inherited from the annuity exceeds $25,000 and your sister’s will doesn’t shift the burden to someone else, you will owe inheritance taxes.”

If a tax Is due, the executor of your sister’s estate will be required to file the New Jersey inheritance tax return within eight months of her death if an extension hasn’t been requested, Novick said.

“At that time, the executor will ask you to send a payment to cover your share of the tax,” he said. “Both the executor and the State of New Jersey will have legal recourse against you should you fail to remit such payment.”

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This story was originally published on June 16, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.