Q. Can you explain the millionaire’s tax in New Jersey and how it will work?
A. New Jersey hasn’t made the state very friendly for taxpayers of every kind. Here’s how this tax works.
New Jersey, like the federal government, has a marginal tax rate system, said Adam Sandler, an attorney with Einhorn Harris in Denville.
He said state uses progressive tax brackets and increases the tax rate for each bracket.
For well over a decade, the New Jersey individual income tax brackets have remained unchanged, he said.
“The top bracket for individuals, whether such individuals file as single or as married filing jointly, was a marginal rate of 8.97 percent for taxable income over $500,000,” he said.
The tax was calculated as $27,807.50 plus 8.97 percent of income in excess of $500,000. As such, a taxpayer with taxable income of $10 million would owe state income tax of $879,957.50 ($27,807.50 + ($9,499,999.99 x .0897)),” he said.
As part of his budget proposal, Governor Murphy initially suggested a true “Millionaire’s Tax” to raise revenue.
“The proposal would have taxed income in excess of $1 million at 10.75 percent,” Sandler said. “However, the new budget deal recently signed into law sets a higher top bracket – income over $5 million will be taxed at 10.75 percent beginning in tax year 2018.”
The tax rate imposed on income between $1 million and $5 million will remain unchanged.
Sandler said the tax for the new top bracket is calculated as $431,457.50 plus 10.75 percent of income earned in excess of $5 million.
Using our above example, a taxpayer earning $10 million would owe state income tax of $968,957.50 ($431,457.50 + ($4,999,999.99 x .1075)), he said. Under the new law, the same taxpayer owes an additional $89,000.
“So if you make between $1 million and $5 million, you dodged a bullet, he said.
Not only does the “Multi-Millionaire Tax” hit high-income earners with a larger bill in April, Sandler said, they are no longer afforded any relief on their federal return.
“The Tax Cuts and Jobs Act signed into law by President Trump in December caps the deduction for state and local taxes at $10,000 beginning in 2018,” he said. “As a result, our taxpayer gets a double whammy this year – a bigger New Jersey tax and a loss of the deduction for those taxes on his or her federal return.”
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