After much discussion and political deal-making, on October 14, 2016, Governor Chris Christie officially signed legislation implementing a new tax package to raise money for the Transportation Trust Fund to help repair New Jersey’s roads, bridges and various other infrastructure. Although the increase in gas tax is what caught the attention of most people, this was not the only change potentially affecting you and your wallet.
The new law includes:
- An increase in the tax on gasoline in the amount of 23-cents per gallon;
- A complete phase-out of New Jersey’s Estate Tax (not the New Jersey Inheritance Tax);
- Increasing pension and retirement income tax exclusions; and
- A slight reduction to the sales tax.
New Jersey Gas Tax
News media has focused on a 23-cent-per-gallon hike in the gas tax to pay for transportation work. Under the legislation, the gas tax will increase for the first time since 1988 from 14.5 cents per gallon to 37.5 cents per gallon to fund the Transportation Trust Fund over the next eight years. This increase is set for November 1, 2016. The New Jersey gas tax is pegged to consumption, not to the price of a gallon of gasoline. The tax rate will not rise or fall automatically as gas prices rise or fall. Instead, the law puts a “cap” on how much money the state can raise from the tax. Therefore, if gas consumption increases and the state sells more gasoline, then the tax rate will go down (or at least it is supposed to). If consumption decreases, (which typically happens on any increase in gasoline price which results in an increase of people purchasing hybrid vehicles) then the tax rate will increase to make up for the slowing revenue.
Repeal of the New Jersey Estate Tax
New Jersey has long held the distinction of being atop the list of worst states in which to die by having an exemption for estate tax of only $675,000. This will all change on January 1, 2017. Under the new legislation, the New Jersey Estate Tax will be phased out over a period of time. On January 1, 2017, the New Jersey estate tax exemption will increase from $675,000 (the lowest exemption in the nation) to $2,000,000. The estate tax exemption is the maximum amount of property that a New Jersey resident may currently pass at death, free of New Jersey Estate Tax. This means that individuals dying on or after January 1, 2017, can leave $2,000,000 to children or other Class A beneficiaries and not be subject to any New Jersey Estate Tax. There is still no tax between spouses as the tax occurs on the second spouse’s passing.
Under pre-2017 law, an individual estate of $2,000,000 with no surviving spouse will generate a New Jersey Estate Tax of approximately $100,000. A $100,000 savings sounds great, but hold on, it gets better! On January 1, 2018, the New Jersey Estate Tax will be completely eliminated. Therefore, the only estate tax you would have to worry about is the Federal Estate Tax, which is currently $5,450,000 and is indexed for inflation.
This all sounds fantastic except there are many unknowns. Will the next governor of New Jersey freeze the New Jersey Estate Tax at $2,000,000? Will the next President of the United States change the Federal Exemption to $3,500,000? There is a lot of uncertainty and only time will tell. The old adage still rings true: the only thing that is constant is death and taxes.
New Jersey Inheritance Tax
Missing from the new legislation is any relief from New Jersey’s Inheritance Tax. Only a handful of states have both an estate tax and an inheritance. You guessed it - New Jersey is one of those states that have both. This tax does not apply to inheritances by a spouse, parent, child, grandchild or great-grandchild of the deceased individual (known as “Class A” beneficiaries). Transfers to anyone other than a Class A beneficiary or a charity is subject to New Jersey’s Inheritance Tax at rates between 11% and 16% depending on your Class. For example, an individual leaving a $1,000,000 estate to his nieces and nephews will be subject to approximately $153,000 in New Jersey Inheritance Tax. The New Jersey Inheritance Tax is here to stay and there has been no discussion to change it.
Retirement and Pension Income Tax Exclusion
The retirement and pension income tax exclusion is only available to taxpayers with $100,000 or less in gross income. That benefit is only available to taxpayers 62 years of age or older or those who, because of a disability, are eligible for Social Security benefits. This exclusion however, will be phased in and will not be immediately implemented. The phase-in is as follows:
- For a married couple filing jointly, the level at which income taxes are excluded will rise from $20,000 to $40,000 after Jan. 1, 2017; to $60,000 after Jan. 1, 2018; to $80,000 after Jan. 1, 2019; and to $100,000 after Jan. 1, 2020.
- For a married person filing separately, the exclusion will increase from $10,000 to $20,000 after Jan. 1, 2017; to $30,000 after Jan. 1, 2018; to $40,000 after Jan. 1, 2019; and to $50,000 after Jan. 1, 2020.
- For an individual filing as a single taxpayer, the exclusion will rise from $15,000 to $30,000 after Jan. 1, 2017; to $45,000 after Jan. 1, 2018; to $60,000 after Jan. 1, 2019; and to $75,000 after Jan. 1, 2020.
New Jersey Sales Tax
On January 1, 2017, the sales tax will decrease from 7 percent to 6.875 percent. The following year, the sales tax will decrease another quarter of a point to 6.625 percent. How long it will stay at this rate is unknown, but it seems like it will be ripe to increase back to 7 percent at some point in the future to make up for the loss in “sales tax revenue” New Jersey will surely claim.
What Should You Do Now?
It is important to review your current estate plan to see if changes are necessary. Many estate plans were designed to minimize New Jersey Estate Taxes. If you have questions or it has been awhile since you have looked at your estate planning documents, now is the perfect opportunity to dust them off and set up an appointment with your attorney to review the documents with you.
Author: Blake R. Laurence