22 Jul Can you clear up this inheritance tax confusion?

Q. In a post about the inheritance tax, your expert said: “Similarly in computing your income tax for New Jersey, when inheritance taxes are paid on an IRA, only the increase in value since the date of death should be taxed by the State of New Jersey. In other words, the value reported and taxed on the inheritance tax return is deemed the beneficiary’s basis for New Jersey income tax purposes. Thus, the estate or inheritance tax on such retirement assets may reduce the income tax payable on such assets.” Can you provide an actual reference in the tax publications regarding this approach for the basis? The accountant preparing the NJ 1041 K-1 forms for the beneficiaries is not aware of this guidance and was intending to pass along the full IRA value on the K-1 forms. How does that get reduced in the NJ 1040 filing as we have already paid inheritance tax on the IRA value?
— Help!

A. We went back to Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park, who answered that initial question.

She said the New Jersey Division of Taxation periodically publishes guidance to assist both professionals and the public. One of the publications is GIT-12 which in January 2024, as well as prior years, which provides as follows:

“Pension, Annuity, and IRA Income: Generally, pension and annuity income received by a survivor or beneficiary is taxable if they exceed the decedent’s previously taxed contributions to those retirement plans. If the pension or annuity was subject to the New Jersey Inheritance Tax, the value of the pension or annuity 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.”

“Note that the above provision applies only if the retirement account was subject to New Jersey inheritance tax, thus it was not paid to a Class A beneficiary,” she said. “If no New Jersey inheritance tax was paid on the account, this adjustment would not be applicable.”

“If the taxable amount was incorrectly reported on an income tax return filed, you should discuss the filing of an amended return with your tax advisor,” Romania said.

Good luck.

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This story was originally published in July 2024.

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.