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How the new estate tax works

Many New Jersey residents may be wondering about how the recent changes to law relating to estate taxes, also known as the "death tax," may affect them. The good news is that the majority of people will not be impacted by changes to the estate tax, and a large number of those who are affected will only be to a limited degree. The new law states that the first $5.25 million of an estate is tax exempt, and anything beyond that number will be taxed at a 40 percent rate.

The 40 percent rate may seem high to some individuals, but the effective tax rate ends up being much lower for most people. Due to the fact that the first $5.25 million are exempt, even someone with an estate valued at $20 million will only end up with an effective tax rate of 18.8 percent because only about $15 million of the estate is actually taxed.

In addition to the fact that the actual tax rate ends up being lower than it first appears, the majority of people will not be impacted by the estate tax. Based on information from the Tax Policy Center, less than 3,800 estates, or 0.14 percent of all individuals who die in a year, will end up owing estate taxes. Of those numbers, it is estimated that only 20 small businesses or farms will end up paying estate taxes per year.

While the majority of people will not be impacted by the federal estate tax, many states have their own estate taxes that have much lower thresholds. A lawyer could explain how state and federal estate taxes may impact someone's estate planning and help people accommodate for them.

Source: Life Health Pro, "What you don't know about the estate tax", Tom Nawrocki, August 15, 2013

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