The New Jersey Tax Amnesty Program applies to state tax liabilities for tax returns due on or after February 1, 2009 and prior to September 1, 2017. The program provides incentives for taxpayers who come forward and pay delinquent state tax liabilities during the amnesty period. Taxpayers who take advantage of the program are relieved from half of the otherwise applicable interest and any late payment penalty, late filing penalty, cost of collection, delinquency penalty, or recovery fee is abated. This can result in significant savings.

A taxpayer who has not filed a tax return to report the tax for which he or she is seeking amnesty must file the return by the end of the amnesty period (ie, January 15, 2019). In addition, a taxpayer’s participation in the program represents a waiver of all administrative and judicial rights of appeal concerning the payment, and no payment made under the program is eligible for refund. Taxpayers are still required to pay any civil fraud or criminal penalty arising from an obligation imposed under any state tax law. Taxpayers under criminal investigation or charge for any state tax matter at the time of payment are not eligible for the program.

It is in an eligible taxpayer’s best interest to take advantage of the program. Taxpayers who are eligible but do not take advantage of the program may be charged a post-amnesty penalty of an additional 5% of any eligible amount not paid during the amnesty period. The New Jersey Division of Taxation is not permitted to waive or abate this penalty.

In our experience, the Division of Taxation is invested in meeting revenue goals by the end of the amnesty period, and is more amenable during this period to resolving all types of tax disputes more favorably to taxpayers.

On November 15, the IRS announced the official estate and gift exclusion amounts for 2019 in Revenue Procedure 2018-57.

For an estate of any decedent dying during calendar year 2019, the applicable exclusion is increased from $11.18 million to $11.4 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $22.8 million estate, gift and GST tax free to their children and grandchildren in 2019.   If no new tax law is passed, the increased exclusion amounts are scheduled to expire on December 31, 2025, which would mean a reduction in the exclusion amounts to $5 million plus adjustments for inflation.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $15,000.

The gift tax annual exclusion to a non-citizen spouse has been increased from $152,000 to $155,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

The New York exclusion amount was changed as of April 1, 2014, and does not match the federal exclusion amount.  In 2018, the New York exclusion amount is $5.25 million.  Beginning in 2019, the exclusion is scheduled to increase to $5.49 million, and then will increase with inflation each year thereafter.  It is important to note that, unlike the Federal exclusion amount, the New York exclusion amount is not portable, meaning if the first spouse to die fails to utilize his or her full exclusion amount, the surviving spouse will not be able to utilize the first spouse to die’s unused exclusion amount.

On November 1, the IRS announced cost of living adjustments for various retirement accounts, including IRAs and 401(k) plans.  The changes are as follows:

  • For the first time since 2013, the IRA contribution limit will increase from $5,500 to $6,000 in 2019. Catch up contributions if you are age 50 or older remain unchanged at $1,000 for IRAs.
  • For 401k plans (and 403(b) plans), the retirement plan contribution amount will increase from $18,500 to $19,000. Catch up contributions for age 50 and older participants remain unchanged at $6,000.
  • The income phase-out for taxpayers making contributions to Roth IRAs will increase from $122,000 to $137,000 for singles and heads of household and for married couples filing jointly, the income phase-out is from $193,000 to $203,000.
  • The limitation on the annual benefit for defined contribution plans (i.e. 401(k) plans and profit sharing plans) will increase from $55,000 to $56,000.
  • The annual compensation limit will increase from $275,000 to $280,000.

The New Jersey Appellate Division recently issued its opinion in Estate of Van Riper v. Dir., Div. of Taxation, No. A-3024-16T4 (N.J. Super. Ct. App. Div. Oct. 3, 2018), upholding the Tax Court’s finding that the full fair market value of a marital home transferred to a trust was subject to New Jersey Inheritance Tax.  The case highlights the importance of understanding the effect of transferring property into trusts for estate planning and tax purposes.

A husband and wife transferred their home into an irrevocable trust and retained the right to live in the home until the death of the survivor.  Any assets remaining after their deaths were to be distributed to their niece.  It appears that this trust was created in connection with Medicaid planning.  The NJ Tax Court held that, due to the fact that the couple retained a life interest in the property and delayed their niece’s enjoyment of it until both their deaths, the value of the home in the trust was subject to Inheritance Tax.  Estate of Van Riper v. Dir., Div. of Taxation, 30 N.J. Tax 1 (2017).  

On appeal, the Estate argued that each spouse held only one-half ownership interest in the property at the time they transferred it to the trust, so the Inheritance Tax should only apply to one-half of the value of the home.  The appellate court upheld the assessment of the full value of the home because the couple owned the property as “tenants by the entirety,” meaning they each “held an interest in the entire estate, not fifty-percent interests.”  Van Riper, slip op. at 8-9.  This reasoning was further supported by the fact that at the first spouse’s death no Inheritance Tax was paid on the property as it qualified as an exempt transfer from husband to wife under New Jersey law.  See N.J.S.A. 54:34-2(a)(1).

This cautionary tale warns New Jersey taxpayers of the complications that may arise from retaining interest in property during one’s lifetime, even if such property has been placed in an irrevocable trust.  It is strongly advised that taxpayers seek the assistance of an estate planning attorney to better understand the tax and other consequences of certain planning techniques.

Last week, the IRS released proposed regulations regarding investing in Qualified Opportunity Funds (“QOFs”).  Click here for a summary of the QOF regime that was enacted as part of the 2017 Tax Cuts and Jobs Act. The proposed regulations generally address three topics:

  1. The requirements for deferring gain recognition by investing in a QOF;
  2. Rules for corporations or partnerships to self-certify as QOFs; and
  3. The requirements for a corporation or partnership to qualify as a QOF.

Highlights of the proposed regulations include the following:

  • The proposed regulations provide that only capital gains are eligible for deferral. Where a sale results in both capital gain and ordinary income (such as depreciation recapture), a taxpayer can defer only the capital gain.
  • A partnership itself can elect deferral of eligible gain. To the extent the partnership does not elect, a partner in the partnership can elect deferral with respect to the partner’s distributive share of eligible gain.  The partner can make such an election within 180 days of the last day of the tax year in which the gain occurs.
  • The deferral election will be reported on a Form 8949. The self-certification to qualify as a QOF will be reported on a Form 8996.
  • The proposed regulations clarify that the exclusion of gain after holding a QOF investment for 10 years qualifies even after a Qualified Opportunity Zone (“QOZ”) designation expires. This was a concern raised by many commentators based on the statute.
  • Pre-existing entities may qualify as QOFs, subject to certain requirements.
  • A QOF may hold cash and other nonqualified financial property for up to 31 months (a “working capital safe harbor”) if the QOF has a written plan that identifies the property as held for acquisition, construction or substantial improvement of tangible property in the QOZ, a written schedule exists evidencing the use of the property, and the QOF substantially complies with the schedule.
  • The proposed regulations provide further guidance about how to qualify as a “QOZ Business.” In brief:  A QOF must hold 90% of its assets in “QOZ Property.”  QOZ Property is either (1) “QOZ Stock” (stock of a corporation that is a QOZ Business), (2) “QOZ Partnership Interest” (partnership interest in a partnership that is a QOZ Business), or (3) “QOZ Business Property.”  If the QOF invests in a QOZ Business (eg, stock or partnership interests) to meet this requirement, the proposed regulations provide that 70% of the tangible property of the subsidiary corporation or partnership must be held for use in QOZ Business Property.  The leniency of this rule makes it likely that QOF will use subsidiary entities to make investments.
  • The proposed regulations also clarify how a business will qualify as a QOZ business.

The IRS is soliciting comments on the proposed regulations and planning to issue additional regulations.  Investors should try to stay flexible as the rules in this new area may change.  Nonetheless, as the rules become clearer, investors can better evaluate the planning opportunities that investing in QOZs offer.