Explanation of property taxes in New York, New Jersey and Connecticut
By Mari Galvin.
The Tax Cut and Jobs Act of 2017 (TCJA) doubled the amount of property that an individual can pass on without federal transfer taxes. As of January 1, 2019, the federal exemption is $ 11.4 million, which allows a couple to transfer a total of $ 22.8 million during their lifetime and / or upon death. For a large portion of American citizens, this has made tax planning at the federal level obsolete. However, planning for federal income tax, state estate taxes, and other considerations still make planning necessary. Here’s an overview of state property taxes in the tri-state area: New York, New Jersey, and Connecticut.
Inheritance and gift tax. New York State imposes an estate tax on the transfer of property of any deceased individual who, at the time of death, was either a resident of New York State or a non-resident who owned movable property or buildings located in the state.
For a resident, the deceased’s gross estate is equal to his or her federal gross estate less tangible personal property and real estate outside of New York City, plus some limited appointing powers and the amount of most post-2013 donations. Inclusive gifts are all taxable gifts made within three years of the date of the deceased’s death that are not already included in the gross federal estate. This does not include real or tangible property located in another state or outside of the United States. From the gross estate of the deceased resident, the executor (or administrator when the deceased died intestate) may deduct the deductible items allowed under the IRC (whether or not a federal return is filed), except to the extent that these deductions relate to real property or tangible personal property located outside the State.
Non-residents owning real and tangible property in New York City are subject to state estate tax. Cooperative apartments are not real property. Condominiums held in S corporations with a business purpose are also considered intangible personal property and do not form part of the gross estate of a non-resident in New York. New York State taxes non-resident estates on the deceased’s movable and tangible property located in the state at the time of death and adds to the free taxable estate transfer (s) after on April 1, 2014, when the deceased was a resident of New York City. York and comprising (1) tangible and real personal property situated in the State and (2) intangible personal property used in a trade, business or profession carried on in New York.
The New York City Inheritance Tax Exemption amount is called the Basic Exclusion Amount or BEA. On March 31, 2014, Governor Cuomo significantly increased the BEA, but he did so over a period of time, with the last increase to be phased in on January 1, 2019. This is when the BEA would be phased in. equal to the amount of the federal exemption, as adjusted for inflation. Since the enactment of the TCJA, New York has not revised its BEA, so practitioners should not be fooled by increases in the TCJA for federal purposes; New York BEA tied to current federal exemption before TCJA, or $ 5,000,000 adjusted for inflation using the CPI (unchained-CPI). As a result, New York’s current BEA is $ 5,490,000 as of January 1, 2019, while the federal exemption is $ 11.4 million.
When Governor Cuomo increased the BEA, he also established a âcliffâ that is phasing out the BEA for residents and non-residents. The phase-out is called âcliffâ because the taxable areas of New York that exceed 105% of the BEA will not benefit from the exemption: it is completely eliminated. For estates valued between 100% and 105% of the âcliffâ, consideration should be given to using the âSanta Clauseâ to increase the amount that can be transferred to heirs while also giving to charities.
Here is some additional information:
- The unused basic exclusion amount of a New York deceased person is not transferable to their spouse.
- The state allows a QTIP (Qualifying Terminal Interest Property) election whether or not a federal estate tax return is filed.
- New York does not have an inheritance tax.
- New York does not impose tax on donations. But, as noted above, post-2013 donations made within three years of death can be reintegrated into the taxable estate for inheritance tax purposes.
- New York does not have a tax on generational leap transfers.
- New York imposes a maximum estate tax rate of 16% on the value of a deceased’s taxable estate exceeding $ 10,000,000.
- Buyers of domains that own real estate will generally need a tax exemption to complete a sale.
- The state estate tax return (ET-706) is due nine months after the date of death.
- Unless there are errors or special circumstances, the New York State Department of Taxation will provide a closing letter four to six months after filing to certify that no tax is owed or to serve as a final receipt for tax due.
Property taxes. The New Jersey inheritance tax was repealed by Governor Christie on October 14, 2017 with an effective date of January 1, 2018. The new law also eliminated the real estate and tangible property tax from a deceased non-resident.
Inheritance tax. New Jersey inheritance tax is still in effect and is taxed based on the following categories of beneficiaries:
Class A: Surviving spouses, parents, children and grandchildren are exempt
Class C: Siblings and stepchildren are subject to tax after integrated exemptions.
Class D: Nieces, nephews, aunts, uncles, friends and non-relatives are fully subject to inheritance tax
Class E: Charitable institutions are exempt.
Here is some additional information:
- Since New Jersey does not impose inheritance tax on assets passed on to a spouse, the use of QTIP choices is not applicable.
- New Jersey does not impose a generation jump transfer tax.
- New Jersey excludes many types of insurance products and pension benefits from tax. It is generally not recommended to designate your estate as beneficiary, which is often the default choice.
- New Jersey does not impose a tax on donations.
The inheritance tax was reformed in 2017 to reflect the federal exemption amounts and changed again after the TCJA.Governor Malloy signed a state budget bill on October 31, 2017 that increased the state’s estate tax exemption amount from $ 2,000,000 to $ 11,180,000 d ‘by 2019. It did so by tying the state exemption amount to the federal estate tax exemption amount. This meant that, unlike New York, the new TCJA exemption amounts and the application of the chained CPI as an annual inflation adjustment index would apply to the increase that Connecticut enacted in 2017. the amount of the exemption from state inheritance and gift tax. The Connecticut bill was passed before the TCJA and this sudden increase was apparently an unexpected result, as Connecticut quickly passed another bill that phased the increase in its exemption amount over a further three years.
The Connecticut exemption amount will be increased as follows: $ 2,600,000 in 2018; $ 3,600,000 in 2019; $ 100,000 in 2020; $ 7,100,000 in 2021; $ 9,100,000 in 2022; then, from 2023 to December 31, 2025, Connecticut’s exemption will equal the amount of the federal estate tax exemption, which is currently $ 11,180,000. Again, unlike New York which uses the old 2014 CPI index for annual inflation adjustments, the Connecticut inflation index is linked to the same federal index (chained CPI) and, therefore, the amounts and Connecticut’s exemption will be the same from 2023 to the end. from 2025. Connecticut estate tax is payable six months from the date of death.
The CT gift tax remains, but is also tied to the amount of the federal exemption by 2023. Connecticut is the only state that still has a gift tax. However, the first budget proposed by the newly elected Governor Lamont included the repeal of the state gift tax.
Special condition considerations:
- Connecticut does not allow portability of the unused exemption amount of a deceased spouse.
- Connecticut allows a reverse QTIP election so that during years when the Connecticut exemption amount is less than the federal exemption amount, an executor can make a QTIP election for a matrimonial trust if such tax planning is required. justified.
- There is a cap on the maximum inheritance tax payable. Max. estate tax is currently $ 20 million, but will decrease to $ 15 million.
- The Connecticut Generation Hopping Transfer Tax does not apply to generation hopping transfers after December 31, 2004.
- If you are wondering what happened to the Connecticut estate tax, it has been repealed and does not affect the estates of people who died after December 31, 2004.
Doubling the amount of the federal estate tax exemption may give individuals the feeling that estate planning is no longer a major concern. However, this is not the case. We will continue to see life events prompting individuals to consult their trusts and estate attorneys. For example:
- a child is born and clients ask who should be appointed guardian;
- divorce occurs, and both parents or divorcing partners come to ensure that the assets are passed on according to their wishes which may now be different from those before the separation; and
- deaths occur and, again, we are reassessing to whom and how the assets should be allocated.
Economic factors will also remain a driving force for the richer customer. For example:
- those whose accumulated wealth exceeds the federal exemption amount of $ 11.4 million ($ 22.8 million for a couple); and
- all clients who reconsider their choice of domicile in the State of origin after the TCJA.
Changes in tax laws create pivotal moments for reassessing plans and taking advantage of new opportunities. It’s one of those times. If you are considering a change of domicile, please consult a qualified estate planner or tax professional to ensure that you are taking all the necessary steps to effect an effective change.