New Jersey Tax Reform Will Affect Retirees and Business Owners
Recent Legislation passed and signed into law the most significant NJ tax changes in over a decade. Most importantly, it begins to change our state’s reputation as one of the most tax unfriendly states in the country, particularly for retirees of moderate to significant wealth and all business owners.
Summary of the tax cuts:
- Eliminate the Estate Tax: the estate tax exemption will rise from $675K to $2MM per person on 1/1/2017 and the tax will go away completely on 1/1/2018.
- Tax Savings for Retirees: the income tax exclusion on taxable pensions, annuities, and IRA withdrawals will increase over the next 4 years from $20,000 to $100,000 for joint filers and from $15,000 to $75,000 for individuals
- Sales Tax Cut: the sales tax rate will decline from 7% to 6.875% on 1/1/2017 and then to 6.625% on 1/1/2018
- Other tax changes: the Earned Income Tax Credit for the working poor will be increased starting this year and a personal exemption is now allowed for Veterans of the military or National Guard
Business owners to rejoice by this decision:
In our recent whitepaper, Closed For Business: Is NJ Pushing out Small and Medium-Sized Companies?, we cited the elimination of both NJ Estate and Inheritance tax as the number one priority to improve the business climate in the state. According the NJBIA 2016 Business Outlook Survey, 67% of business owners cite estate and inheritance taxes affecting decisions about their business’ future. Eliminating the estate tax is a great start and will help keep businesses in NJ. While more needs to be done to bring NJ into competitive balance with other states, succession planning for businesses, particularly family businesses, will be much easier by 2018 with this tax reform.
Financial Planning Opportunities – here are a few initial ideas to consider:
- New Jersey residents will want to review their estate plans to ensure they are optimizing the tax efficiency of their estate.
- In particular, the amount of assets that one might use to fund a trust sheltered from NJ estate tax will change between now and 1/1/2018.
- Beneficiaries need to be reviewed very carefully within the context of estate plans as the NJ inheritance remains in its current form (yes, NJ is one of only 2 states that has both an estate and inheritance tax). Assets that pass to Class B beneficiaries (not spouses, parents, children, and grandchildren) will still face a very onerous tax system that only has a $25,000 exemption.
- Some former NJ residents who spend the majority of their time in another state but still have ties or a home in NJ may want to re-domicile here by 2018. Estate taxes have been a big driver of out-migration among wealthy individuals for more than a decade and this would be a great opportunity for some who long for more time in the Garden state.
Not great news for everyone:
Unfortunately the extensive tax reform would likely not be possible without increasing taxes somewhere. Commuters are the most adversely affected group as the NJ gas tax is being increased by $0.23 per gallon. New Jersey currently has one of the lowest gas costs in the nation but that will soon go away. The gas tax will aid the Transportation Trust fund which has been headed towards insolvency.
If you have questions about how this tax reform impacts you, please reach out to any combination of your Wealth Advisor, Accountant, and Estate Attorney.
Sources: www.nj.com, NJBIA, NJBIZ
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