20 Jan Can I deduct the ‘exit tax’ on my tax return?
Q. We live in Pennsylvania and sold a townhouse in New Jersey. We were charged the exit tax. Can this tax be claimed on our federal income tax return?
— Taxed enough
A. Let’s first clarify what the so-called exit tax means.
It’s not a special tax levied on a person who sells property in New Jersey.
Instead, it’s an estimated income tax withholding imposed by the New Jersey Division of Taxation on the closing of a nonresident taxpayer’s sale of a New Jersey residence, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
The amount withheld is the greater of 10.75% of the gain realized or 2% of the selling price.
Even if the residence was sold at a loss, this withholding will apply, Becourtney said.
Becourtney said you can include this state income tax as part of your state and local income and real estate tax deduction, commonly referred to as the SALT deduction.
“However, the Tax Cuts and Jobs Act (TCJA) imposed a severe limit on the SALT deduction: $10,000 if your filing status is single, married joint, or head of household, $5,000 if it’s married separate,” Becourtney said. “If you had more than $10,000 of state income tax and real estate tax payments during the year, the `exit tax’ will produce no federal tax benefit because you will have already reached the maximum SALT deduction.”
This situation is predicated on your itemizing your deductions, he said. With the $10,000 SALT deduction limit, far fewer taxpayers itemize their deductions and instead take the larger standard deduction.
“The standard deduction for a joint filer for 2019 is $24,400, with an additional increment of $1,300 for a spouse who has attained age 65,” he said. “If both spouses have attained age 65, the standard deduction for 2019 is $27,000.”
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This story was originally published on Jan. 20, 2020.
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