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Financial Planning in the Garden State Thumbnail

Financial Planning in the Garden State

Why staying to reap what you sow may not be as bad as you think.

Not many places can say they neighbor a world class city, offer access to some of the most beautiful shorelines and have some of the best public school systems in the US. It’s always been a great place to raise a family if you could afford it and having spent the last two decades in New Jersey, I have witnessed a shift to a more thoughtful approach to retaining the wealthy retiree or the up and coming younger cohorts after the early part of the new millennium saw a bit of an exodus. According to the US Census, the population in 2010 was 8.8MM and had flatlined for a number of years before rising to nearly 9.3MM as of 2022, some of which was the result of the pandemic shift to suburbia. No doubt, there are still some challenges to cost of living but policy shifts around taxes means things today are bit more balanced versus states like California or neighboring NY. We realize, we are not likely going to get many heads nodding in agreement for those in the 8.97% tax bracket and above (individuals and couples with >$500K of Income) or those that pay the country’s highest property taxes, but the good news is that if you plan well you may be able to have New Jersey serve as your home beyond just those working years. We can’t do anything about the weather for those 2-3 months, but here are a handful of tax and planning concepts that are worth better understanding.

For small business owners: New Jersey is one of a number of states that allows for the Pass Through Entity Tax (PTET) treatment. A provision that allows partnerships and S Corps to have their entity taxes serve as a deduction against their Federal income taxes, this can be a material savings. For example, a business that is generating net income of $500,000, by paying their state taxes (roughly $28K) at the entity level would save nearly $9K on their Federal return assuming they are in the 32% marginal bracket. In addition the taxpayer may still itemize their deductions should it be worthwhile if itemizing means exceeding the standard deduction. Work with your advisor and tax professional to better utilize this approach.

529 Plans: New Jersey was one of a number of high earner states which had not offered a state tax deduction for individuals contributing to a 529 plan. Legislation went into effect in 2022 that allowed taxpayers to claim a tax deduction at the state level if their income is $200,000 or less. That threshold applies to either single or joint filers. Contributions can be made on behalf of children, grandchildren or even yourself. Keep in mind to get the tax deduction you must contribute to the state sponsored plan called the NJBest plan, offered through Franklin Templeton. 529 plans remain one of the best planning tools given their tax free growth, their portability and the recent provision that allows excess funds to be moved to a Roth IRA, subject to income and contribution limits as well as the fact the account must have been in existence for 15 years or longer.

Retirement Distributions: While New Jersey is likely many other states that do not tax social security benefits, they also provide exemptions of retirement income from pensions, IRAs or workplace plans like a 401K or 403b plan. For married filing joint, that may mean you can exempt up to $100,000 worth of retirement income whereas for single filers the limit is capped at $75,000. Both exclusions are for those whose income, inclusively of the retirement income does not exceed $100,000. There is a partial exclusion for those between $100,001-125,000 (50%) and another tier for those with income from $125,001-$150,000. For a couple that has $20,000 in passive portfolio income, $75,000 in retirement distributions and $60,000 in social security benefits you may be paying little to no tax.

Property tax freeze: Those aforementioned taxes can eat up a sizable portion of one’s cash flow, especially those living on a fixed income. 2023 introduced a rather sizable increase in the means testing threshold, jumping from to $163,050. You must be 65 years or older or collecting social security disability and the income test includes all income sources including social security which is not actually taxed at the state level.

Estate taxes: For many years the New Jersey estate tax exemption moved in lockstep with the

Federal exemption, which in 2001 was $675,000, a number that seems incredibly low when compared to today’s figures, which today is $13.61MM. This means about 99.5% of Americans will not face one last tax burden with their estate owing 40% on the excess. New Jersey had frozen at that level all the way through 2016 before rising to $2MM in 2017 and altogether disappearing in 2018. Rather than head to Florida to avoid estate taxes, you can stay put. By comparison, next door in New York the exemption caps out at $6.94MM (there are some other nuances there.) New Jersey does have an inheritance tax, but unlike Pennsylvania, where that tax applies to all beneficiaries, class A beneficiaries, like children or grandchildren are exempted from tax in the Garden State. Proper planning is likely to help avoid the inheritance taxes through the use of gifting and other tools some of which are beyond the scope of the discussion today.

Capital Gains: New Jersey like most states does not offer a separate capital gains tax rates on the sale of capital assets (stocks or bonds) so earnings are taxed at the marginal income tax rates, which range from as low 1.4% to as high as 10.75%. This will not apply to Treasury Securities or state specific municipal bonds however. New Jersey does not allow the carry forward of capital losses unlike with your Federal return so there can be some value in avoiding over-harvesting tax losses. The state does follow the Federal regulations with respect to the sale of a primary residence which has been lived in for 2 of the last 5 years, with an exemption on the capital gains of $250,000 for a single filer and $500,000 for joint filers.

Realty Transfer Tax & Fee: Also referred to as the “Mansion Tax” this 1% surcharge is assessed on the buyer of a home when the value of the property is $1,000,000 or more. For example someone buying a home worth $1MM will pay an extra $10,000 at closing to the state.The seller of a property is also assessed a transfer fee aside from any taxes due which is based on the value of the property, while less than the aforementioned Mansion Tax it can still amount to a significant expense at closing.

In summary, it’s not just the low gasoline taxes that make New Jersey a great place for a pit stop, but a state offering climate, culture and opportunity. Like most living decisions there is a lot that goes into it and having an advisor that knows the landscape well makes for an even better experience.

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This article is for educational purposes only and is not intended to be specific tax, legal, or investment advice. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. Sources: US Census Bureau, New Jersey Department of the Treasury, Wallethub.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.