December 14, 2009
Unlike the IRS, New Jersey does not allow a loss in one category of income to offset gains or positive amounts of income in another category. Moreover, a loss in one category of income cannot be used as a loss carryforward and be deductible in a later year. Perhaps some examples will clarify this.
For 2009 an unmarried individual has salary income of $100,000 and a capital loss of $10,000. For federal tax purposes the individual has “adjusted gross income” (or AGI) of $97,000 and a $7,000 capital loss carryforward that can be used to offset future years’ capital gain income.
For New Jersey purposes the individual cannot offset the capital loss (one of the categories of income) against salary (another category), and has to pay New Jersey tax based on $100,000 of income. If that same person has $10,000 of capital gain income in 2010, the full $10,000 is taxable because the 2009 loss cannot be carried forward.
Because of these rules you should consider reviewing your 2009 stock/securities transactions to see where you stand regarding capital gains and losses to date. Accelerating capital gains up to the amount of losses may not cause a greater federal income tax liability (but you will be using up loss carryforwards – a timing difference). You will, however, be absorbing otherwise non-deductible New Jersey losses and at the same time reduce New Jersey taxes on a future year capital gain (a permanent savings).
Using the same facts as in Example 1 above, a taxpayer who presently has unrealized capital gains of between $7,000 - 10,000 should consider realizing those gains (especially if the gain would likely be realized in 2010). This will absorb the 2009 New Jersey loss and only cost federal taxes to the extent the gain reduces the otherwise deductible federal loss. That is, a $7,000 loss leaves a $3,000 loss as being non-deductible for New Jersey and does not change the taxpayer’s 2009 federal tax; but an $8,000 gain leaves a non-deductible New Jersey loss of $2,000, but also increases federal AGI to $98,000.
When reviewing your portfolio make sure you consider capital gain distributions from mutual funds (New Jersey and the IRS treat these the same way). Also keep in mind that the IRS and New Jersey have different rules when it comes to capital gains generated within a partnership, S corporation, or other flow-through entity (each of which are yet other categories of income for New Jersey tax purposes).
Please call me if you have any questions regarding the use of this tax planning strategy.
Richard Lichtig, CPA
(201) 678-1400 ext. 5209