12 Dec Is this inheritance also subject to income taxes?

Q. A sibling passed away and left their Federal Government Thrift Savings Plan (TSP) to the remaining siblings. The contributions to the TSP were pre-tax dollars. I assume that the TSP is treated as a 401(k) for federal government employees so New Jersey would not have taxed his contributions while he was working. The TSP distributed a lump sum to the sibling beneficiaries and withheld money for federal income taxes but no state tax. As New Jersey residents, it seems the siblings will owe an 11% inheritance tax. Since I am already paying 11% on this distribution to the state for the inheritance tax, do I also need to pay income tax on this amount? For example, if the lump sum was $100,000 and I paid $11,000 for the inheritance tax, why should I pay income tax on the full $100,000? Seems like a double taxation.
— Beneficiary

A. We’re sorry to hear about the loss of your sibling.

Here’s what you need to know about the inheritance.

When a beneficiary receives a distribution from a retirement plan as a result of the death of the retirement plan owner, the taxable income from this distribution is considered “Income In Respect of a Decedent (IRD),” said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said New Jersey requires the beneficiary to report the income when it is received on their own tax return on the “Other Income” line.

New Jersey does indeed impose an inheritance tax for property transferred from a deceased person to certain beneficiaries. The amount of tax depends on several factors, including who the beneficiaries are and how they are related to the decedent, the date of death value of the assets, the type of asset and whether the decedent lived in New Jersey, Papetti said.

Where the beneficiary lives is not a factor, he said.

The inheritance tax charged ranges from 11% to 16% for different “classes” of beneficiaries, he said.

Class C, which includes siblings, will be subject to a range of tax. The first $25,000 is not taxed, the next $1.075 million is taxed at 11%, the next $300,000 is taxed at 13%, the next $300,000 is taxed at 14% and anything over $1.7 million is taxed at 16%, he said.

“Pursuant to NJ Publication GIT 12, in general, if taxable income from a pension, annuity and IRA received by a surviving beneficiary was also subject to New Jersey inheritance tax, the value of the pension, annuity or IRA income for New Jersey inheritance tax purposes is considered to be the decedent’s previously taxed contributions and is deductible in determining the taxable amount received,” Papetti said.

Therefore, Papetti said, it appears that because the TSP is subject to the inheritance tax, its value is considered the decedent’s previously taxed contributions, “so none would be subject to New Jersey income tax, only New Jersey inheritance tax.”

Email your questions to .

This story was originally published on Dec. 12, 2023.

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.