How Will New Jersey’s Tax Reform Affect You?

After several attempts to reform the tax code, New Jersey Governor Phil Murphy has finally succeeded in enacting his millionaire’s tax, as it is known among both supporters and adversaries to the plan. Reaching a deal with New Jersey legislators, Murphy’s reform will increase taxes on New Jersey residents earning more than $1 million per year, effectively lowering New Jersey’s top income tax rate from $5 million per year to $1 million. Those in New Jersey’s new top earning bracket will see their taxes increase from 8.97 percent to 10.75 percent, meaning that anything earned beyond the additional $1 million will be taxed at that rate on top of their federal income tax obligations. 

The reform will purportedly use the additional funds raised - an estimated $390 million to $450 million per year - to send annual rebate checks to New Jersey’s middle-class earners. Anyone making less than $75,000 per year - or $150,000 in the case of couples filing jointly - will be sent a rebate check of $500, with the remaining $100 million to $150 million raised going toward the state’s $5.6 billion budget gap. Unfortunately, as many have noted, this additional $150 million will do little to actually assuage New Jersey’s budgetary woes. Critics of the plan say it’s a political move meant to pander to the middle class that does little to actually fix New Jersey’s complicated and cumbersome fiscal budget.

If you’re a business owner or top earner in New Jersey, it’s quite likely that this new reform will impact you. Here are some things to take into consideration when planning for your upcoming fiscal year.

As COVID-19 continues to wreak havoc on small to mid-sized companies, many critics of Murphy’s tax reform suggest that the move will be particularly detrimental to this sector of the economy. Since taxes on so-called pass-through businesses - S corporations, partnerships, and sole proprietorships - are imposed on the individual level, it’s likely that many small businesses earning in the $1 million+ bracket will be facing a tax increase under this new plan. When the economy is already struggling to regain its footing, and many businesses are struggling to meet the demands of payroll let alone their tax bill, the consequences can have serious implications for small business owners. 

If you’re a high-earner or a successful small business in New Jersey, there are some steps you can take to cushion the blow of this new tax reform. First, consider whether keeping your primary residence in New Jersey still makes sense, or if it might be time to consider relocating your principal assets elsewhere. If you’re a corporate executive, consider speaking with your company about whether you can defer income to avoid triggering the tax and elect a 10-year payout, so if you do decide to exit the state at some point the state won’t be able to source that money for tax purposes. Business owners, in turn, can consider using trusts to move their assets out of state in order to avoid state taxes once their businesses are sold. 

Finally, take the reform as an opportunity to have an in-depth discussion with your tax and estate planning team so that you can prepare strategies to minimize your obligations on a yearly and long-term basis. Your team may be able to design a solution that lessens the blow, now and in the future.