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New Jersey budget includes significant retroactive tax changes

On Tues., Sept. 30, 2020, Gov. Phil Murphy signed into law a nine month, $32.7 billion budget for the remainder of fiscal year 2021, which ends June 30, 2021. The budget contains corporate and individual tax increases, a potential tax rebate for New Jersey families and numerous other changes.

Corporate business tax surtax

The corporate business tax surtax, which was scheduled by law to fall to 1.5% beginning Jan. 1, 2020 and sunset after Dec. 31, 2021, has been retroactively extended back to Jan. 1, 2020 through Dec. 31, 2023 at the original surtax rate of 2.5%.

The surtax continues to apply to corporations, other than public utilities, that have New Jersey taxable income greater than $1 million.

If the federal corporate income tax rate is increased to at least 35%, the law provides for the surtax to be suspended (Senate Budget and Appropriations Committee Statement to Senate No. 2934, State of New Jersey).

The surtax rate adjustment alone is estimated to generate $250 million in revenue annually.

The law provides for a complete waiver of all penalties associated with the retroactive increase in the surtax to Jan. 1, 2020. However, because the law did not mention interest relief as well, Baker Tilly is advising our clients to accrue for interest at this time. 

Individual gross income tax: Millionaire’s tax

Retroactive to tax years beginning on or after January 1, 2020, taxpayers with taxable incomes of $1 million or more will be subject to New Jersey’s top tax rate of 10.75%. Previously, taxable income of $500,000 to $1 million was subject to an 8.97% tax rate.

The law provides for transition rules for payroll withholding and estimated tax payments for taxpayers at the new tax rate as well as underpayment penalty and interest relief for payments made prior to Nov. 1, 2020. 

Applying the highest marginal rate to taxable incomes of $1 million or greater is estimated to generate an additional $400 million in revenue annually.

Tax rebate for New Jersey families

Certain taxpayers may qualify for a tax rebate of $500 or the amount of actual tax paid if less than $500 for the tax year.

To be eligible, the taxpayer must be a resident of New Jersey with at least one dependent child. The taxpayer’s gross income tax liability must be greater than zero and gross income must not exceed the following: (1) $150,000 if married and filing jointly, filing as a head of household or filing as a surviving spouse; or (2) $75,000 if married and filing separately or filing as a single taxpayer. 

The rebate will begin in the year 2020 but is contingent upon the appropriation of funds in 2021 by the New Jersey legislature. The rebates will be payable beginning in July of 2021.

The rebate to New Jersey families has an estimated cost of $300 million annually, if fully funded by the legislature.

Individual gross income tax: Combat pay exclusion

To align with federal tax treatment, New Jersey will exclude from gross income, amounts received as combat zone compensation by members of the Armed Forces of the United States, as noted in Statement No. 2934. To be excluded from New Jersey taxation, it must also be excluded from federal gross income pursuant to IRC §112.  This is effective for tax years beginning in 2021.

The estimated cost of the exclusion is unknown.

Gross premiums tax: Health Maintenance Organization (HMO) assessment

The assessment on the net written premiums of a HMO has been increased from 3% to 5% for fiscal year 2021, beginning on Oct. 1, 2020 and for each fiscal year thereafter. 

The increase in the HMO assessment is estimated to generate $103 million in revenue annually.

Should you have questions regarding the New Jersey tax changes for 2020, or any other state tax matter, please contact a member of the Baker Tilly state and local tax team  to ensure you are well prepared and in compliance.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Frank Czekay

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