New Jersey Increases Taxes and Fees

By Mark H. Levin

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‘Millionaire’ Tax

The most publicized of these tax acts increases the New Jersey gross income tax to 8.97% for taxpayers with taxable income of $500,000 or greater, effective retroactively to January 1, 2004. The old 6.37% rate will continue to apply to taxable income up to $499,999. This new $500,000 bracket applies to all taxpayers regardless of filing status.

Along with this new tax rate, New Jersey has issued two new withholding tables to reflect the new 8.97% rate. The first table takes effect on September 1, 2004, continuing through December 31, 2004, and incorporates a top rate of 12% to catch up for the period prior to September 1, 2004, when the top withholding rate reflected the old rate. The second withholding table takes effect January 1, 2005, and has a top rate of 9.9%.

Real Property

Another feature of the budget package is the withholding on the sale of New Jersey real property by nonresidents. Effective August 1, 2004, estimated tax payments will be required (with certain exceptions) on the sale of New Jersey real estate by nonresident individuals, estates, or trusts. The estimated tax will be based on the gain on the sale and will be at the highest personal income tax rate (8.97%).

The following sales will be exempt from this withholding:

• The sale of a personal residence as defined in IRC section 121;
• Where the seller is a mortgagor conveying property in a foreclosure or in a deed in lieu of foreclosure;
• Where the transferor or transferee is—
• An agency or authority of the United States,
• An agency or authority of New Jersey State,
• The Federal National Mortgage Association (Fannie Mae),
• The Federal Home Loan Mortgage Corporation,
• The Government National Mortgage Association (Ginnie Mae), or
• A private mortgage insurance company.

In addition to the basic fee on the sale of real property of $1.75 per $500 of consideration, effective for transfers of real property on or after August 1, 2004, the legislation imposes a general fee on all transfers of real property where the consideration is in excess of $350,000, at the following rates (in terms of each additional $500 of consideration or fraction thereof):

• $350,000–$550,000     $0.90 per $500
• $550,000–$850,000     $1.40 per $500
• $850,000–$1 million     $1.90 per $500
• Over $1 million             $2.15 per $500

Effective for transfers of real property on or after August 1, 2004, the legislation imposes upon the buyer of real property zoned residential, whether improved or not, where the consideration is in excess of $1 million, an additional separate fee equal to 1% of the full amount of the consideration.

Depreciation and Deductions

Effective for assets placed in service on or after January 1, 2004, in taxable years beginning on or after January 1, 2004, New Jersey will no longer allow any 30% or 50% “bonus” depreciation.

Along with the decoupling of bonus depreciation, New Jersey will no longer allow a depreciation deduction based on the bonus depreciation under IRC section 280F.

Effective for property placed in service on or after January 1, 2004, the maximum amount allowed to be deducted under IRC section 179 is limited to the maximum amount allowed under IRC section 179 as it existed on December 31, 2002, $25,000.

Effective for taxable years 2004 and 2005, a corporation may use net operating losses (NOL) up to 50% of the corporation’s entire net income. (For tax years 2002 and 2003 the NOL deduction was suspended.) Any NOL that is disallowed because of suspension will have its life extended.

Other Items

Effective August 1, 2004, a fee of $1.50 per tire will be imposed on the sale of all tires that are subject to the New Jersey sales tax, including new tires that are a component of a purchased or leased motor vehicle.
Effective July 1, 2004, the cigarette tax was increased to $2.40 per pack, up from $2.05 per pack.

Effective September 1, 2004, a 6% tax will be charged on certain cosmetic medical procedures that are not reconstructive in nature, including, but not limited to, cosmetic surgery, hair transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peel, laser hair removal, laser skin resurfacing, laser treatment of leg veins, and cosmetic dentistry.

Effective July 1, 2004, a gross receipts tax of 3.5% was imposed on certain ambulatory health-care facilities with gross receipts of at least $300,000, due in four installments. The tax is capped at $200,000. The tax rate for 2006 will be recalculated so as to produce the same amount of revenue as was collected in 2005, except that the $200,000 cap remains unchanged. The 2006 tax rate will remain in effect for 2007 and thereafter.

Effective June 29, 2004, a special interim assessment of 1% on new written premiums was imposed on HMOs authorized to operate in New Jersey. The interim assessment is effective July 1, 2004, through June 30, 2005 (fiscal year 2005).

The current 6% fee charged on the gross receipts from the retail sale of billboard advertising space is extended through June 30, 2006, after which it will be reduced to 4% for the period July 1, 2006, through June 30, 2007, and will be eliminated effective July 1, 2007.

Property Tax Relief

While the major aim of the 2004/05 budget package was to raise revenue, it also included an increase in the rebates based on the real estate taxes paid on a taxpayer’s residence.

Under the legislation, the current NJ SAVER rebate program is folded into the homestead property tax rebate program. Under the new combined homestead property tax rebate program, the maximum property tax rebate will increase to $800, from $250. For elderly, disabled, and low-income taxpayers, the maximum property tax rebate will increase to $1,200, from $775; however, a taxpayer whose gross income exceeds $200,000 will not be entitled to a rebate.