On Sept. 29, 2020, New Jersey Gov. Phil Murphy signed the 2021 Fiscal Budget, including in excess of $700 million in tax increases poised to assist the state in recovering from a projected budget deficit due to the coronavirus pandemic.
The highlights of the FY2021 budget and corresponding tax bills include an extension of the previously enacted corporate tax surcharge and an expansion of the previously approved ‘millionaire’s’ tax, increasing the individual tax rate for taxpayers with revenue in excess of $1 million to 10.75%.
Surtax for corporate taxpayers
Assembly Bill 4721 extends the previously enacted 2.5% temporary surtax for taxpayers with allocated net income (entire net income) in excess of $1 million. The surtax, which was previously set to expire on Dec. 31, 2021, has now been extended through Dec. 31, 2023. Additionally, the surtax will no longer decrease after the first two years as originally enacted. The surtax was originally enacted for tax years beginning on or after Jan. 1, 2018.
Noteworthy with upcoming federal elections, the bill includes a suspension clause that would suspend the surtax should the federal corporate tax rate increase to a rate of at least 35% of taxable income.
For taxpayers effected by this retroactive change, all underpayment penalties will be waived.
Assembly Bill 10 subjects taxpayers with taxable income in excess of $1 million to a 10.75% total tax rate effective for taxable years beginning on or after Jan. 1, 2020. The new rate is a 1.78% increase from the previous 8.97% tax rate for taxpayers with incomes between $1 million and less than $5 million. The rate also aligns with the current rate on incomes in excess of $5 million effective in 2019.
Employers should note that for purposes of calculating withholding tax for the 2020 taxable year, withholding by every employee from salaries, wages and remuneration paid by an employer for services rendered in excess of $1 million, but not over $5 million, will be at a rate of 21.3%, effective no later than Nov. 1, 2020.
To help alleviate the millionaires tax, beginning with the 2020 taxable year and subject to appropriation by the legislature, qualified taxpayers are eligible for a tax rebate of the lesser of $500 or an amount equal to the amount of tax paid after credits for the taxable year.
Several other states have proposed or are considering additional individual income taxes to raise revenue due to pandemic shortfalls including California and Maine. Taxpayers in all states should be prepared because state tax changes are coming.
While the New Jersey budget includes specific provisions meant to increase taxes in the state, it does not address any specific decoupling of provisions included in the Coronavirus Aid, Relief and Economic Security Act (CARES Act) signed by President Trump on March 27, 2020.
Unlike most fiscal years, New Jersey extended the 2020 fiscal year three months from June 30, 2020 to Sept. 30, 2020, and thus shortened the 2021 fiscal year, which begins Oct. 1, 2020 and will run through Sept. 30, 2021. Due to the delayed budget, both the New Jersey Division of Taxation and taxpayers have limited time to plan and account for the new and amended provisions. Accordingly, impacted taxpayers should contact their tax advisers as soon as possible with questions about planning opportunities.