The long-rumored Millionaire’s Tax in New Jersey is now law. After many tries the tax was approved effective January 1, 2020 via a vote in New Jersey’s legislature in late September. It’s estimated that the tax will impact approximately 16,000 residents of New Jersey and 19,000 non-residents. So what exactly is the Millionaire’s Tax? Specifically, it raises the tax rate on those individuals who have income in excess of $1,000,000 to 10.75% from 8.97%. The 10.75% rate was already being paid by those who had income over $5,000,000 but now that threshold has been lowered.
What does it mean for New Jersey?
One additional impact of the New Jersey Millionaire’s Tax is that for the 2020 tax year, the State legislature approved up to $500 tax rebates for those making under $75,000 (or $150,000 for those filing jointly), which will certainly assist those feeling economic impact from the COVID-19 crisis.
Long-term the move is a way for the State to increase revenue, though in doing so it also reinforces New Jersey’s reputation as not a friendly tax state for businesses and individuals. The Tax Foundation found New Jersey to be ranked last in the United States in terms of its business tax climate and on the individual side New Jersey ranks as just fourth state to enact a so-called millionaire’s tax in addition to having the second highest top tax rate in the country behind just California.
As the tax climate worsens in New Jersey, it’s more likely that businesses and individuals leave the state for more favorable tax jurisdictions.
What can New Jersey taxpayers do about it?
As we see it, there are three things that New Jersey taxpayers may consider in the current tax environment.
- As mentioned above, a growing trend in recent years has seen many New Jersey residents leave the state and settle in lower tax paying states in other parts of the country. The United Van Lines Annual National Movers Study found that in 2019, more residents moved out of New Jersey than any other state with 35% leaving for a job elsewhere, 33% leaving for retirement, and 19% leaving for lifestyle purposes. Leaving a high tax state, especially in retirement, may allow individuals to live a more comfortable lifestyle in retirement.
- The Millionaire’s tax will have a large impact on business owners within the State, especially those with pass through businesses such as partnerships and sole proprietorships where there income is imposed at the individual level. This is especially true if those business owners are looking to sell their business. The sale may push them into the Millionaire’s tax, meaning they will net less from their sale. Business owners may seek to move businesses outside of the state or place certain assets in out of state Trust’s to receive more favorable tax treatment.
- Finally, a certain percentage of individuals facing this tax hike, will likely do nothing and choose to pay it. Taxes and finances are not always the leading factor for individuals choosing where to live and often times being close to family and having access to things like great healthcare are the motivating factors for individuals to stay in New Jersey.
For those staying in New Jersey, this does reinforce that you must be proactive about planning for taxes long-term and ensure your portfolio is running as tax efficiently. If you’d like to discuss either of these items, feel free to reach out to your RegentAtlantic Wealth Advisor.
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