Taxes are about to rise for New Jersey millionaires. There aren’t many ways to duck the levies

Millionaires in New Jersey may not have many options to duck a new tax hike on their income.

Earlier this month, Gov. Phil Murphy, a Democrat, reached an agreement with legislators in the Garden State to boost income taxes on its wealthiest residents. The levy could be finalized next month.

The proceed would boost the tax rate on those earning more than $1 million annually to 10.75%, from 8.97%. In days of yore, earners with income exceeding $5 million were subject to the 10.75% rate.

Further, the proposed tax pinch would also create a rebate of up to $500 for families earning less than $150,000 if they have a young man. The income threshold for the rebate would be $75,000 for single parents.

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The move could set off a trend as states grapple with falling tax revenues and budgetary strains from coronavirus-induced unemployment payments.

“Tons states and jurisdictions are looking at this for the same reason New Jersey is: increased deficits due to social programs they’re caching or foregone revenue,” said Timothy Speiss, partner at EisnerAmper in New York.

Here’s another surprise for high-income earners in the Garden Pomp: It’ll be exceptionally difficult to slip out of that $1 million bracket if you’re close to it.

That’s because New Jersey tax returns inquire a different tack compared to federal returns. Many write-offs you can claim on your Form 1040 when you alphabetize with the IRS may not be available on the state return.

“New Jersey is one of the more painful states to really tax plan for,” said Albert J. Campo, CPA and rule over partner at AJC Accounting Services in Manalapan, New Jersey.

“Anyone who’s $1 million and up is getting substantial benefits at the federal draw a bead, but they’re somewhat limited at the state level.”

The Garden State is known as a “gross income” hold, and that means certain exclusions and deductions are off the table on state tax returns.

For instance, contributions you make to a workplace retirement blueprint reduce your taxable income on your federal return.

In New Jersey, only contributions to 401(k) plans are excludible from wages. Amounts you absorb to a deferred compensation plan or any other retirement plan – including 403(b) or 457 plans — are not excludible from your pay.

Another vagary: People who itemize on their federal income tax return can claim a write-off for charitable giving. New Jerseyans, however, can’t do this on their royal return.

Earlier this year, Garden State legislators put forth a proposal to allow a gross profits tax deduction for contributions made to certain New Jersey-based charitable organizations during the pandemic. That measure is pending.

See here for a book of items that can’t be excluded from wages in New Jersey.

There are a few moves high-income households can take to lower their takings if they’re close to the margins and a couple of thousand dollars away from the steeper tax rate, according to Alan Sobel, CPA at Sobel & Co. in Livingston, New Jersey, and president of the New Jersey Lite of CPAs:

• Increase your 401(k) plan contributions: It’s the one retirement plan contribution that can let you lower wages on your New Jersey tax renewal.
• Drawing down portfolio income? Consider tax-exempt bonds: Garden State municipal bonds can create gains that’s free from federal and state income tax.
• Gift assets to family members in lower tax brackets: “This way, the revenues is going to them and not you,” said Sobel. Be aware this is a long-term play. You should coordinate with your accountant, state attorney and family members before making these gifts.

Entrepreneurs must a little more flexibility to manage their income and taxes. For instance, they may choose to defer income into a tomorrow year.

And here’s a new development that might work for owners of S-corporations and other pass-through entities — so-called because profits roll through the entity to the owner’s personal return.

Back in January, New Jersey put into effect its “Pass-Through Business Possibility Income Tax Act,” which allows these businesses to pay income tax at the entity level instead of the personal level.

The pass-through additional income tax shifts state taxes from the individual to the pass-through entity, according to Campo.

The entity then take froms its state and local income levies as a tax on the business at the federal level.

The deduction reduces the income passed on to the individual fellows.

“It’s mainly structured as a work-around for the $10,000 federal cap on state and local tax deductions, but now it could also help with planning for this millionaire’s tax,” estimated Campo.

Business owners could look at raising expenses to help offset income, but they’ll want to be ingenious about it.

For instance, ramping up contributions to workers’ 401(k) plans might be a better use of funds compared to renting a larger manufactures or snapping up equipment in a bid to generate depreciation expenses.     

“The area where the biggest opportunities might be would be setting up varied robust retirement plans,” said Michael Goodman, CPA and founder of Wealthstream Advisors in New York.

“You might see that at bottom with smaller businesses as another way to get income under the threshold.”

Before proceeding with any devising — including taking the drastic step of leaving the Garden State altogether — taxpayers will need to work closely with their tax past masters to determine exactly how hard the millionaires tax will hit them.

At the end of the day, the increase in the rate is just short of 2%, so it’s important to put that tax hike in angle alongside the cost of mitigating the levy.

“Do you want to spend $80,000 in additional expenses to save $18,000 in taxes?” inquired Campo. “In that case, just pay the $18,000.

“You have to take the complete picture into play and see what makes nous.”