New Jersey enacts sales tax rate reduction and estate tax phase-out
Tax policy agreement raises gas tax for first time in almost 30 years
TAX ALERT |
On Oct. 14, 2016, New Jersey Gov. Chris Christie signed Assembly Bill 12, providing for several state and local tax changes including a sales and use tax rate reduction, estate tax phase-out and an increase in the gas tax.
Effective Jan. 1, 2017, the state’s 7 percent sales tax rate is reduced to 6.875 percent, and effective Jan. 1, 2018, the rate is further reduced to 6.625 percent. This is the first change in the state sales and use tax rate since it was increased to 7 percent, from 6 percent, in July 2006. The bill also provides that sales of materials, supplies or services for use in erecting structures for others, or building on, improving, altering or repairing real property of others shall be taxed at the current period sales and use tax rate. However, if the sales were made for use in the performance of a contract that is either fixed price not subject to change or modification, or entered into by an unalterable formal written bid, such sales will be subject to the tax in effect during the time period in which the contract was entered into or that bid was made.
Additionally, the New Jersey estate tax is phased out over a two-year period. The current estate tax provides a $675,000 minimum threshold to be subject to the tax. Assembly Bill 12 replaces that threshold with an exclusion amount of $2 million for decedents dying on and after Jan. 1, 2017, and then eliminating the estate tax completing for decedents dying on and after Jan. 1, 2018. The inheritance tax is unchanged by the legislation.
The legislation also makes a number of changes to various other provisions of the New Jersey tax code:
- A gas tax increase resulting in an additional $.23 per gallon effective Nov. 1, 2016; the new state gas tax rate will total $.375 per gallon
- Gross income tax pension and retirement income exclusions are capped at $100,000 for joint filers, $75,000 for individuals and $50,000 for married but filing separately after a four-year phase-in concluding for taxable years beginning on or after Jan. 1, 2020
- Increase in the New Jersey earned income tax credit to 35 percent (up from 30 percent) of the federal benefit amount beginning in tax year 2016
- Additional personal exemption of $3,000 for qualifying veterans
The gas tax increase and tax reductions were highly debated, but ultimately approved by the General Assembly. The legislation is expected to help fund statewide transportation projects, which have been on hold since July. The gas tax increase is the first in the state since 1988 and according to reports, will propel the state from the forty-ninth lowest rate to the top 10, making it much closer to New Jersey’s neighboring states—Pennsylvania ranked one and New York ranked three in 2016. Additionally, the phase-out of the estate tax is expected to persuade New Jersey residents from relocating for retirement. New Jersey taxpayers with questions about Assembly Bill 12 should speak to their tax advisors.