In the beginning of this month, many tax changes were enacted in New Jersey, signed into legislation by Governor Phil Murphy.
First, a tax rate increase: the highest tax rate has been increased to 10.75% on taxable income exceeding $5 million for the 2018 tax year. The withholding rate for salaries, remuneration, and other services exceeding $5 million is now 15.6% for the rest of 2018 (this rate must be implemented by September 1, 2018).
Property tax deduction: maximum property tax deduction has increased to $15,000 for tax years after 2017.
Earned income tax credit: earned income percentage is increased to 37% of the federal tax credit in 2018, 39% in 2019, and 40% in 2020.
Child and independent care credit: a resident taxpayer with federal child and dependent care credit can claim a nonrefundable gross income tax credit of up to $500 for paying expenses of one qualifying individual and up to $1,000 for two qualifying individuals. It will be a percentage of the federal credit allowed based on New Jersey taxable income.
Carried interest provisions: a 17% surtax of income from investment management services will be implemented once similar legislation is approved in other states. Taxpayers with net income exceeding $1 million will be charged a 2.5% surtax in 2018 and 2019, and a 1.5% surtax in 2020 and 2021.
Amnesty: a tax amnesty period is in play until January 15, 2019, for those who failed to pay past NJ state taxes by the original due date. These taxpayers must pay the tax and half of the balance of interest for liabilities for tax returns due between February 1, 2009 and September 1, 2017, as well as any criminal penalties under the law. A 5% penalty is introduced if payments are not satisfied during the amnesty period.
Mandatory combined reporting: a combined group must designate a managerial member to file a combined unitary tax return for all taxable members and to pay the tax for the group. The managerial member may determine whether the combined group is on a world-wide basis or an affiliated group basis, and if he/she does not determine, the group will be considered on a water’s-edge basis. If determined on an affiliated group basis, members must report all income, loss, and allocation factors that are or would be subject to tax if doing business in New Jersey.
Allocation of combined group income: for computing the sales fraction, the denominator is that of the combined group, and the numerator will be determined with each taxable member treated as a separate taxpayer with only its receipts assignable to New Jersey. All taxable members are liable for the taxes due of other taxable members, as well as interest, penalties, and additions. The managerial member’s privilege period becomes the privilege period of the combined group, and any member with a different accounting period must report amounts from its accounting year that ends during the group privilege period.
Net operating losses from separate return years: net operating losses are post-allocation losses based on the last privilege period prior to the effective date of this law. The prior carryover deduction will be applied against the net income allocated to New Jersey. Combinable captive insurance companies are included in combined returns.
Sourcing rules modified: after 2018, if a service is received in New Jersey, it is sourced to New Jersey. If it is received both inside and outside of New Jersey, a portion of the sale is considered allocated to New Jersey based upon the percentage received inside the state. If a customer cannot be determined as sourced either inside or outside New Jersey, the service is considered received at the customer’s billing address (if an individual) or at the location from which the service was ordered (if not an individual). If the location from which the service was ordered cannot be determined, it is considered received at the customer’s billing address.
Deferred tax deduction: the combined group (if a publicly traded company) is entitled to a deduction equal to one-tenth the amount of an increase in net deferred tax liability, a decrease in net deferred tax asset, or the aggregate change from asset to liability, The entitled deduction begins the first privilege period after January 1st of the fifth year of this law, and remains eligible for 10 years.
Dividend exclusion: for any privilege period after December 31, 2016, entire net income excludes 95% of dividends included in computing federal income tax paid by one or more subsidiaries owned 80% or more by the taxpayer.
If an additional tax liability is created under these laws, there will be no penalty or interest.