On September 24, 2020, the New Jersey Legislature passed bill A10 (“Bill”). The Bill contained important tax related information effective beginning for tax year 2020.  Per the announcement from Governor Phil Murphy’s office ”today signed the Fiscal Year 2021 (FY 2021) Appropriations Act into law, working together with legislative leadership to enact a revised spending plan that manages to protect core priorities and deliver middle-class tax relief during the historic fiscal crisis caused by the COVID-19 pandemic. The budget plan also fully reestablishes the millionaires tax that expired in 2010, instituting the existing 10.75% rate on income over $5 million to income earned over $1 million.”

Millionaires’ Tax

The Bill has retroactively increased the marginal gross income tax rate applicable to taxpayers with taxable income exceeding $1 million in taxable years effective January 1, 2020 from 8.97% to 10.75%. The 10.75% tax rate was already being applied to taxable income above $5 million.

Ensuing the announcement of the governor’s announcement, the New Jersey Division of Taxation issued a notice addressing employers’ responsibility to increase withholding effective immediately on those earning in excess of $1 million. “Effective immediately, employers must withhold Income Tax at the rate of 21.3% from salaries, wages and other remuneration in excess of $1 million, but not in excess of $5 million, during the taxable year. This higher withholding rate allows taxpayers affected by the rate increase to "catch up" on their withholdings for the year since the new tax rate is retroactive to January 1. The Division of Taxation will not impose interest or penalties for insufficient payment of estimated tax and/or withholdings that may be due before November 1, 2020, if the underpayment is a result of the new tax rate.”

Taxpayer rebate

In addition, the Bill provides effective for tax year 2020 a tax rebate for eligible taxpayers. To be eligible for the rebate, the taxpayer must be a resident of the state, have at least one dependent child, have a gross income tax liability greater than zero, and have gross income not exceeding either:

  • $150,000 if (1) married and filing jointly, (2) filing as a head of household, or (3) filing as a surviving spouse
  • $75,000 if (1) married and filing separately, or (2) individuals filing as a single taxpayer

According to the Bill, the director of the Division of Taxation will issue rebates to eligible taxpayers between July 1 and July 31, or between July 1 and the end of the year for taxpayers who were granted gross income tax return extensions.

Conclusion

In conclusion, as noted by the Office of Legislative Services (“OLS”), it is estimated that this Bill will increase fiscal year 2021 gross income tax revenue by $414 million to $427 million with the revenue generation being partially offset in fiscal years thereafter by the cost of the rebate program established by the bill.  The OLS estimates that gross income tax revenue for fiscal years 2022 and 2023, respectively, is expected to increase by $390 million to $450 million annually, and the rebate program is anticipated to cost at least $300 million annually paid. It is noted that the additional revenue, approximately $100 million or so will be used to assist in funding the projected budget gap.