After Years of Talk, New Jersey’s Proposed Millionaires’ Tax to Become Reality
- Sep 22, 2020
As a way to equalize the financial toll caused by COVID-19, Governor Phil Murphy has struck a deal with New Jersey Democrats, the party that controls the state legislature.
Under the plan, the state’s revised fiscal year 2021 budget includes an increase in the gross income tax rate on individuals with earned income between $1 million and $5 million to a proposed top rate of 10.75%, up from 8.97%. (New Jersey taxpayers above the $5 million income level have already been paying 10.75% on income of more than $5 million.)
The tax increase is part of a plan to redistribute funds to New Jersey families hard hit by the coronavirus pandemic, while also issuing $500 rebates to families who have a single-parent income of less than $75,000 or two-parent household income of less than $150,000. If the legislation is passed, rebate checks are scheduled to be distributed in the summer of 2021. Neither the tax increase and rebate proposals have yet passed the legislature, but both are likely to prevail given support from Democratic leadership and the fact that the Democrats hold solid majorities in both chambers. The proposed tax increase is part of a nine-month, $32.4 billion spending plan that the state must adopt by the end of this month; New Jersey’s forecasted state revenues were forecasted to plummet this year due to the pandemic.
There is also the possibility that the tax may be retroactive to January 1, 2020. State tax legislation enacted on July 1, 2018 increased the gross income tax rate for income over $5,000,000 and provided a new withholding rate for the remainder of 2018. If the 2020 legislation is signed into law, there could also be a higher withholding rate effective upon passage, to enable taxpayers affected by a 2020 rate increase to “catch up” on their withholdings for the year since the new 2020 tax rate would be retroactive to January 1. New Jersey is a gross income state, meaning taxpayers pay on total income with a few deductions, such as some medical expenses that exceed 2% of income and a portion of real estate taxes on a primary residence. The state has a graduated tax rate system ranging from 2% to the now top rate of 10.75%. Under this new plan, someone making $2 million will pay approximately $18,000 more in taxes. A person with $4 million of income will pay approximately $53,000 more in New Jersey income tax.
The millionaires’ tax has been part of New Jersey taxation discussion for many years. Prior Republican Governor Chris Christie passed the millionaires’ tax five times while in office. Earlier this year, Democrats felt the state taxed residents enough; they had not initiated this tax until the financial toll of the pandemic forced the move. Apparently, the additional revenue -- planned to accommodate a middle-class tax break with the $500 tax rebate -- is what helped push the legislation across the finish line this time.
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Barbara Taibi is a Partner in the Private Client Services Group with years of public accounting and income tax planning and tax return preparation experience. Barbara focuses on helping clients plan for and meet their financial and tax goals.
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