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If You Live In New Jersey, These Tax Rules Might Help You Save On Taxes

If you're a New Jerseyan, it’s important to be aware of certain tax rules so that you can save more of your hard-earned money.

Articles by Eric Bronnenkant

By Eric Bronnenkant
Head of Tax, Betterment  |  Published: August 22, 2019

New Jersey might have some of the best pizza in the nation, but it also has some of the highest income taxes.

We’ll show you how you can take advantage of tax rules for medical expenses, retirement, and investments.

Make the most of your money by considering how New Jersey tax rules can work to your advantage.

New Jersey is the most densely populated state in the nation. What makes the state so popular? Maybe it’s the opportunities to engage in a variety of experiences—from devouring the best thin crust pizza to relaxing at historic Liberty State Park. Due to its unique geography, South Jersey is one of the few places where you can see both a sunrise and a sunset over the water.

It’s not shocking for residents of the Garden State, whether they live in Central NJ or on a prayer, when I remind them that NJ income taxes are among the highest in the nation.

The maximum NJ state income tax rate is 10.75%, but that rate only applies on income above $5,000,000. The top rate for most people is 6.37%, which is the tax rate for married couples filing above $150,000 on their joint tax return.

Unlike some other areas of the country, there are no local income taxes in NJ, so residents are only taxed on income at the state and federal level. Because NJ taxes are so high, people who are usually uninterested in taxes are all ears once they learn more about how they might be able to save on taxes by taking advantage of certain New Jersey tax laws.

First, a reminder: Due to 2017 tax reform, the federal tax deduction for state and local taxes (otherwise known as SALT) is now limited to $10,000 per year. Prior to the implementation of tax reform in the 2018 tax year, there was no dollar limit on the deduction.

This article is intended for purely educational purposes. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Medical Expenses

I’ve previously written about tax deductions and how they work here.

The federal government allows for a deduction for unreimbursed medical expenses that exceed 10% of your Adjusted Gross Income (AGI). That’s a high threshold to meet, so it makes it pretty difficult to get any tax benefit.

NJ is substantially more generous and allows a deduction for unreimbursed medical expenses that exceed 2% of NJ gross income. NJ medical expenses also include employee-paid health insurance premiums, as those are included as income for NJ income tax purposes.

Retirement

Ever wonder why so many people retire in Florida? Sunshine aside, moving to Florida is a common strategy for many NJ residents because Florida has no income taxes. In 2016, one high-income NJ taxpayer moved to FL and it was the “first time a state official has warned of a budget risk because of one resident’s relocation” per the New York Times.

To encourage New Jerseyans to retire in their own state, NJ allows a $60,000 retirement income exclusion for a single taxpayers age 62 or older. The exclusion for married couples is $80,000 (for those unfamiliar, the fact that the married couple does not receive twice the exclusion of a single person is known as the “marriage penalty”).

This exclusion benefit also applies to distributions from IRAs and qualified employer-sponsored plans like 401(k)s and pensions.

This means that up to $80,000 of retirement income will not have any income taxes—as long as the NJ total income on the tax return does not exceed $100,000. Unfortunately, the retirement exclusion completely disappears if total NJ income exceeds $100,000 per tax return threshold—even by just $1.00.

In addition to the retirement income exclusion mentioned above, retirees who are receiving a military pension are also eligible for an unlimited exclusion for pension income related to that specific employment.

Example: A single former Army officer who is currently 65 years old, with a $60,000 annual pension and a $30,000 annual IRA distribution, would be fully exempt from NJ income taxes.

NJ only allows for pre-tax employee contributions to one type of retirement plan: Traditional 401(k) accounts. Employee contributions to 403(b), 457 governmental, Thrift Savings Plan, Traditional IRA, SEP IRA, and Simple IRA accounts are always after-tax for NJ state tax purposes.

Whenever I meet a NJ teacher who has a 403(b), they are typically unaware that NJ taxes the contributions at the state level. These teachers can track their contributions in order to avoid potential double taxation in retirement. If the contributions are left untracked, double taxation could occur if they cannot use their retirement exclusion due to their total NJ income exceeding $100,000 or they take an early distribution before the age of 62.

Social Security

Prior to 1984, Social Security benefits were tax-free to all recipients, regardless of how much other income they received. After the 1984 change went into effect, the federal government has expanded the taxation of Social Security benefits to potentially include up to 85% of benefits as taxable income.

NJ has taken a generous step to fully exempt Social Security benefits from state income tax for everyone—regardless of income.

Investments

As a state, NJ does not always have the power to choose what income it allows exemptions for.

Due to federal law, NJ is required to exempt U.S. government interest from income taxes. This tax break also applies to mutual funds and ETFs that invest in U.S. government bonds.

Municipal bonds issued by the state of NJ and its municipalities are exempt from NJ income taxes. However, interest received on bonds issued by other states and local governments are subject to NJ income taxes.

NJ does not recognize capital loss carryovers. Why is this important? Let’s say you have a $100,000 unused capital loss from a prior year, and a $100,000 capital gain for the current year. The federal government would allow the carryover loss and the gain to offset each other. However, NJ would ignore the unused capital loss from last year and the $100,000 gain from the current year would be subject to NJ income tax.

To help make tax time even easier for our customers who invest, we’ve introduced a new supplemental tax statement which provides a breakdown of US Government interest and in-state vs. out-of-state municipal bond interest.

Here are some fun tax facts to tell your fellow New Jerseyans.

  • Sales tax can be funny sometimes.
    • NJ does not tax unprepared food like a whole bagel, but one that is toasted for you is taxed. As an avid consumer of poppy seed bagels lathered in cream cheese, this tax is pretty unavoidable for me.
    • NJ does not tax pumpkins used for food, but they do tax pumpkins used for decoration.
  • NJ didn’t have income taxes until 1976 when it first introduced a personal income tax with only two brackets: 2% on the first $20,000 of income, and 2.5% on any additional income after that.
  • You’ll probably never guess what I think about on my daily commute as I traverse the Hudson river on the PATH train to get to the Betterment office. Ok, you’re right–I’m always thinking about how taxes can apply to my current situation. I previously mentioned that NJ generally taxes interest on bonds issued from outside of NJ. What about bonds issued by the Port Authority of NY and NJ? There is no state or local tax on interest earned from their bonds for both NY and NJ residents.

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Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

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