A new year is upon us and there are a number of tax developments that business and homeowners should keep an eye out for.
Estate tax to go away
New Jersey has been particularly harsh in the past. Prior to 2000, many states including New Jersey imposed an estate tax equal to the federal death tax credit. This was referred to as the sponge or soak-up tax and was equal to a formula based on the size of the estate and was available to every estate. The result was the federal tax was reduced by the sponge tax. In effect, it was free money to the states. When the Bush tax cuts took effect and the federal estate tax exemption was set to increase each year, this meant a reduced sponge tax. In 2001, New Jersey decoupled from the automatic increases in the federal exemption in order to preserve the tax generated from the soak-up tax. New Jersey taxed estates when value hit the $675,000 threshold.
Many states decoupled when New Jersey did. In the years after 2001, many states reversed this decision. Some states set a higher exemption but did not link the figure to the federal exemption. Others states either conformed to the federal exemption or abolished the estate tax. But on October 14, Governor Chris Christie signed P.L. 2016, c.57 into law, which effectively repeals the tax, according to NJLJ. During 2017, the tax will only apply to estates totaling over $2 million in value and will be eliminated in its entirely after 2018.
The compromise being made is in exchange for an increase of $0.23 in the gas tax, which went into effect November 1, 2016. The source noted that even though the estate tax is nearing its end, New Jersey is one of six states in the country that still charges an inheritance tax under N.J.S.A. 54:34-1 to 34-13; N.J.A.C. 18:26-1.1 to 26-12.12. Although transfers to spouse, children, grandchildren and grandparents escape tax, this law taxes any wealth transfer to a sibling, son-in-law and daughter-in-law over $25,000 by anywhere between 11 and 16 percent, depending on the value. All other persons are taxed at15% or 16%.
The inheritance and estate tax raised approximately $880,000,000, with more than 60% attributable to the inheritance tax. The hope is that residents will remain in New Jersey and thus remain subject to its gross income tax and this will offset any revenue lost from the state tax.
Wait and see approach
The estate tax isn't the only legal change to keep on your radar. Industry experts are eagerly awaiting any news on potential changes to Federal taxes that President-elect Donald Trump hinted at on his campaign trail.
One that will likely be passed and take effect soon is the change from seven income tax brackets to just three, according to the Greenwich Times. Some experts are advising people to defer recognition of income until the following year to tax advantage of what's expected to be a much lower tax rate than is currently in effect.
Angelo Loumbas, a wealth planning strategist with a Greenwich Wells Fargo branch, told the GWT that there hasn't been many conversations from tax payers so far about the implications that new policy changes would bring. This is likely due to the fact that if a change were passed before the end of 2017, it would be retroactive to 2016 financial filings.
With many changes up in the air regarding Federal and state taxes, it should be a busy year for tax authorities, accountants, attorneys and financial advisors.
To keep yourself updated on any additional New Jersey tax changes, head to our Tax Law blog. If you are a New Jersey home or business owner and you are unsure of how to approach your personal or business tax obligations with these changes, Otherwise, if you have any questions or if you would like to discuss the matter, please contact me, . James McDonough, at 201-806-3364.