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 accord with legislators in the Garden State to boost income taxes on its wealthiest residents. The levy could be finalized next month.
The move would boost the tax rate on those earning more than $1 million annually to 10.75%, from 8.97%. Previously, earners with income exceeding $5 million were subject to the 10.75% rate.
Further, the proposed tax tweak would also create a rebate of up to $500 for families earning less than $150,000 if they have a child. The income threshold for the rebate would be $75,000 for single parents.
More from Personal Finance:
You may get a piece of $2.7 billion in health insurance rebates
How your Roth IRA can help fund a home purchase
Retirees may want to rethink reliance on Treasurys for income
The move could set off a trend as states grapple with falling tax revenues and budgetary strains from coronavirus-induced unemployment payments.
"Many states and jurisdictions are looking at this for the same reason New Jersey is: increased deficits due to social programs they're funding or foregone revenue," said Timothy Speiss, partner at EisnerAmper in New York.
Here's another surprise for high-income earners in the Garden State: 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 follow a different tack compared to federal returns. Many write-offs you can claim on your Form 1040 when you file 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 managing partner at AJC Accounting Services in Manalapan, New Jersey.
"Anyone who's $1 million and up is getting substantial benefits at the federal level, but they're somewhat limited at the state level."
State vs. federal
The Garden State is known as a "gross income" state, and that means certain exclusions and deductions are off the table on state tax returns.
For instance, contributions you make to a workplace retirement plan reduce your taxable income on your federal return.
In New Jersey, only contributions to 401(k) plans are excludible from wages. Amounts you divert to a deferred compensation plan or any other retirement plan – including 403(b) or 457 plans -- are not excludible from your pay.
Another quirk: 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 state return.
Earlier this year, Garden State legislators put forth a proposal to allow a gross income tax deduction for contributions made to certain New Jersey-based charitable organizations during the pandemic. That measure is pending.
See here for a list 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 income 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 Society 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 return.
- Drawing down portfolio income? Consider tax-exempt bonds: Garden State municipal bonds can create income that's free from federal and state income tax.
- Gift assets to family members in lower tax brackets: "This way, the income is going to them and not you," said Sobel. Be aware this is a long-term play. You should coordinate with your accountant, estate attorney and family members before making these gifts.
Business owners' flexibility
Entrepreneurs have a little more flexibility to manage their income and taxes. For instance, they may choose to defer income into a future year.
And here's a new development that might work for owners of S-corporations and other pass-through entities — so-called because profits flow through the entity to the owner's personal return.
Back in January, New Jersey put into effect its "Pass-Through Business Alternative Income Tax Act," which allows these businesses to pay income tax at the entity level instead of the personal level.
The pass-through alternative income tax shifts state taxes from the individual to the pass-through entity, according to Campo.
The entity then deducts 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 members.
"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," said Campo.
Business owners could look at raising expenses to help offset income, but they'll want to be smart about it.
For instance, ramping up contributions to workers' 401(k) plans might be a better use of funds compared to renting a larger warehouse or snapping up equipment in a bid to generate depreciation expenses.
"The area where the biggest opportunities might be would be setting up more robust retirement plans," said Michael Goodman, CPA and founder of Wealthstream Advisors in New York.
"You might see that mainly with smaller businesses as another way to get income under the threshold."
Cost vs. savings
Before proceeding with any planning — including taking the drastic step of leaving the Garden State altogether — taxpayers will need to work closely with their tax professionals 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 perspective alongside the cost of mitigating the levy.
"Do you want to spend $80,000 in additional expenses to save $18,000 in taxes?" asked Campo. "In that case, just pay the $18,000.
"You have to take the complete picture into play and see what makes sense."
"Many" - Google News
September 25, 2020 at 02:39AM
https://ift.tt/364aNmt
Taxes are about to rise for New Jersey millionaires. There aren’t many ways to duck the levies - CNBC
"Many" - Google News
https://ift.tt/2QsfYVa
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update
Bagikan Berita Ini
0 Response to "Taxes are about to rise for New Jersey millionaires. There aren’t many ways to duck the levies - CNBC"
Post a Comment