On October 14th, 2016 lawmakers in Trenton agreed a multi-part tax overhaul last week, designed to address the now-defunct Transportation Trust Fund and address ailing infrastructure statewide. The bill passed with bi-partisan support and was signed by Governor Christie. As often is the case, this same bill included other tax changes, big and small, to pull together enough votes to pass, and addressed hot button tax issues in both parties.
The gas tax increase has received the largest coverage, especially with NJ residents who previously took pride in the state’s reputation as having some of the cheapest gas prices in the nation. Starting November 1st, 2016, the gas tax is scheduled to increase by 23 cents per gallon, from 14.5 cents (currently the second lowest in the nation) to a total of 37.5 cents (the seventh highest in the nation). This is the first increase since 1988 and New Jersey’s gas tax will be significantly higher than the national average of 21 cents. However, New Jersey’s gas tax will still be lower in contrast to bordering states’ gas taxes with New York’s at 43.4 cents and Pennsylvania’s at 51.4 cents. The increase will finance the transportation program by charging both resident and non-resident drivers who use NJ roads and fill up at NJ pumps.
There is little question that the transportation funding needed to be addressed, but the forthcoming changes will have material and lasting impact on NJ residents.
Here are a few key takeaways:
NJ Estate Tax Phased-Out
The New Jersey Estate Tax will be completely phased-out over the next two years. The current structure levies an estate tax of up to 16% on estates exceeding $675,000 in assets. New Jersey has a reputation as being among one of the most expensive states for estate transitions and has contributed to an exodus of retirees (many with significant estates).
The NJ Estate Tax phase out will be in two parts: On January 1st, 2017, the New Jersey estate tax exclusion amount will rise to $2,000,000, and the following year starting on January 1st, 2018, New Jersey will no longer have an estate tax.
This change could have major implications on New Jersey residents’ estate plans, especially for those who have created plans that account for the New Jersey estate tax.Contact your AEPG Financial Life Planner to review your estate plan to ensure it best accomplishes your goals.
It is also important to remember that even though New Jersey is getting rid of its estate tax, the inheritance tax remains in effect. The inheritance tax has a maximum rate of 16% in 2016, but unlike the estate tax, it only affects transfers to certain beneficiaries. Assets passed to the decedent’s parents, grandparents, spouses, children, grandchildren, and great-grandchildren are exempt from the inheritance tax in New Jersey.
Life Insurance Considerations
The use of life insurance and its structure as part of an Irrevocable Life Insurance Trust (ILIT) as a planning strategy may be affected. For those ILITs already established, it is unlikely that there is a reason to make costly changes to the trusts due to this law, but future use of this strategy may be limited. It is important to review your total coverage life insurance, as some plans may now need smaller policies to accomplish the same goal.
Sales Tax Reduced to 6.625%
To try to reduce the burden of the new gas tax increases, New Jersey will decrease its sales tax rate from 7% to 6.875% on January 1st, 2017 then finally to 6.625% on January 1st, 2018.
More Retirement Income Excluded from Income Tax
Another benefit that some New Jersey residents will receive is the rise in the retirement income tax exclusion. Currently, only the first $20,000 for couples filing jointly can be excluded from New Jersey income tax. The exclusion will increase over the next four years to $100,000 for married couples filing jointly, $75,000 for individuals, and $50,000 for married couples filing separately. This is a huge windfall for retirees in New Jersey and combined with the estate tax phase out, will go a long way to stemming the outflow of retirees from New Jersey. See our article from April 12, 2016: “Is New Jersey Estate Tax Killing the State?” A study released by the New Jersey Business & Industry Association (NJBIA) in February 2016 indicated that $18 billion of wealth left New Jersey during the 10-year period from 2004 to 2014. Another study of IRS statistics showed that New Jersey lost $12 billion of taxable income between 2004 and 2011.
The study implied an exodus of NJ residents leaving the state over the past dozen years did so to avoid high taxes, including estate taxation and high property taxes. Top destinations included New York and Pennsylvania.
With these major changes taking place soon, there may be planning opportunities that can save you money today and materially reduce costs in the future. Speak to your AEPG Financial Life Planner to review your plan to ensure you remain on track to meet your goals.
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