New Jersey Governor Phil Murphy and State Democratic leaders announced yesterday a revised fiscal year 2021 budget that raises the State’s gross income tax rate on income for families now earning between $1 million and $5 million.
Currently, the State’s top tax rate for income earned in excess of $1 million through $5 million pay 8.97%. Only when income exceeds $5 million does the marginal tax rate increase to 10.75%.
The Governor’s revised budget now increases the tax rate on income over $1 million to 10.75%, making it equal to the current rate paid on income over $5 million. The tax increase is part of a plan to redistribute funds to New Jersey families hard hit by the coronavirus pandemic by issuing $500 rebates to families who have a single-parent income of less than $75,000 or two-parent household income of less than $150,000.
Both the tax increase and rebate proposals have not yet passed the Legislature, but are likely to prevail given support from Democratic leadership and the fact that the Democrats hold solid majorities in both chambers. There is also the possibility that the tax may be retroactive to January 1, 2020.
The increased tax rates, which now edge closer to New York City rates, may push families earning in excess of $1 million out of New Jersey to lower tax jurisdictions such as Florida and Texas.
With the growing and widespread use of technology and mobile work spaces as a result of the pandemic, high earners who have not been working in traditional office spaces for the past six months may flee New Jersey to avoid paying more taxes.
Alternatively, there may be planning opportunities for taxpayers that maintain separate residences in a high and low or no tax jurisdiction such as New Jersey and Florida and may consider changing domicile and the number of days in and out of each respective state to achieve considerable tax savings.