How to Lower New Jersey’s Estate Tax
New Jersey has one of the worst, if not the absolute worst, estate taxes in the country. It is one of two states that has an estate tax and an inheritance tax. Over the past 15 years the federal estate tax exemption, that amount that is exempt from federal estate tax, has increased more than fivefold. Many states have gradually increased their exemptions but New Jersey has kept its exemption, the amount one can pass free of tax, at $675,000. With the average cost of a home at $300,000 it doesn’t take much for the average resident’s estate to reach that threshold.
Over the past several years, I have often been asked about rumors that the state will raise the exemption. Just this past week, a front page article in the Star Ledger talked about efforts in Trenton to generate more money to fix state roads and bridges. New Jersey’s Transportation Trust fund will be out of money soon.
One way would be to raise the gas tax. New Jersey has some of the lowest gas prices in the country, in part because its gas tax is the second lowest in the country. We may have the highest estate tax but counter that with low gas prices. The gas tax is what pays for road maintenance and improvements. Some legislators in Trenton, however, have hit upon another solution. Raise the gas tax but lower or eliminate the estate tax, a tradeoff of one tax for another.
Critics say the state can ill afford to lower or eliminate the estate tax, when it is struggling to balance its budget and fund state pension systems. Last year, just under 3500 estates paid $320 million in estate taxes. Another $330 million was paid in inheritance taxes. The state expects $760 million in revenue this year from estate and inheritance taxes according to the Star Ledger article.
However, if we look a bit closer at the numbers, roughly 1/3 of the tax revenue was generated on estates that exceeded the federal exemption while estates valued at less than $1,000,000 generated approximately $30 million. It is clear that New Jersey can afford to at least increase the estate tax exemption to $1 million without causing much loss in tax revenue.
And raising the exemption to $2,000,000 probably wouldn’t cause much loss in revenue, especially if it is coupled with a higher gas tax. It would certainly bring New Jersey more in line with neighboring states. Connecticut’s estate tax exemption is $2 million and New York is at $2 million, but over the next 4 years is gradually raising its exemption to the federal limit.
Even if New Jersey chooses not to do anything about its draconian estate tax, there are still ways for residents to reduce or in some cases eliminate the tax with timely estate and tax planning. For more information email me at firstname.lastname@example.org