There have been sweeping changes to both the federal and New Jersey tax laws for the first half of 2018.  At the federal level, the elimination of the state and local tax (SALT) deduction, which for decades allowed people to itemize and deduct state and local income and property taxes from their federal bill is now being capped at $10,000.

It has been widely publicized that residents of states with high SALT such as New York and New Jersey will pay much more in overall taxes than those residents of states with no income and/or low property taxes. Northeast states attempting to counteract the impact of recent federal tax laws by forming associations to sue Washington or disguising property taxes as charitable contributions are seemingly ineffective solutions.  To compound the impact of the SALT limitation, New Jersey has recently increased its highest marginal rate to 10.75% for those families with income in excess of $5 million, enacted laws to impose a surtax on carried interests and increased corporate business tax rates.  For more details concerning New Jersey recent tax law changes, see our previous blog post here.

As the 2019 tax season gets underway, high net worth residents of New Jersey and New York will find significant increases in their annual state tax bills. Accountants should be the first to anticipate client questions as to whether a change in residency to states such as Florida could alleviate this increased state tax burden and to what extent state tax savings can be achieved while continuing to own a residence in New Jersey or New York.

The short answer is yes. A well counseled client who becomes a permanent resident of Florida can spend significant time in New Jersey and/or New York and maintain a residence here, but successfully avoid state taxes on non-New Jersey and New York source income. On the other hand, snowbirds, spending three to five months in Florida and the balance of their time in New Jersey / New York face serious exposure, including an audit resulting in an additional assessment of tax, interest and penalties by filing a non-resident return or no state tax return without meeting the statutory requirements for non-residency status.

There are many considerations in changing permanent residence from New York or New Jersey to a tax friendly state such as Florida in an effort to escape the harsh effects of these new tax laws. Aside from feasibility issues — such as whether telecommuting is a viable option and whether children and spouses are amenable to relocating — there needs to be a thorough tax analysis before making that decision to relocate as to whether: (i) changing residence will necessarily reduce state income tax (i.e., is the income sourced in New Jersey or New York); and (ii) if so, to maximize the level of preparedness in anticipation for what will likely be a residency audit from the New York and/or New Jersey tax authorities.

New York has one of the most sophisticated residency audit programs in the country.  New Jersey is also expected to ramp up its program in light of the most recent changes to its tax laws.  The purpose of a residency audit is to determine whether you correctly filed your non-resident or part-year resident income tax return or if no return is filed in the years immediately following a move outside of the state.  The likelihood of a residency audit is particularly high during the first year in which an individual files a non-resident tax return or no return at all.

Once audited, in making the determination of whether an individual is resident of New York or New Jersey, the auditor will first determine whether an individual is domiciled in New York or New Jersey.

If the auditor is persuaded a taxpayer has successfully changed his or her domicile from New York or New Jersey to a different state, that person can still be taxed as a “statutory resident” if he or she maintains living quarters in New York or New Jersey for substantially all of the year and spends more than 183 days in that state.

In a residency audit, the auditor will request EZ-Pass records, cell phone records, calendars, credit card and bank account statements along with travel records.

In addition, the auditor may also request utility bills, vehicle registration and voting registration in an effort to determine how strong your ties are to a specific location and whether you sufficiently abandoned your former domicile.

More intrusive steps may be taken when the auditor is not satisfied with the information that he or she has received and can even subpoena your records from third parties or depose you and/or your family members. If it is determined that you are a resident of a New York or New Jersey and you did not properly file a resident return, in addition to an assessment of unpaid tax, there can be substantial penalties and interest.  For example, in New York, the penalty for late filing is 5% of the tax due for each month (or part of a month) that the return is late, up to a maximum of 25%.  And the penalty for late payment is 0.5% of the unpaid amount for each month (or part of a month) it is not paid, up to a maximum of 25%.  New Jersey also imposes similar penalties for failure to file and failure to pay tax along with interest charges.

If you are a resident of New York or New Jersey and you are considering changing your residency (whether tax motivated or otherwise), it is important that you seek the advice of an experienced SALT counsel to fully understand the potential benefits, feasibility and most importantly, how to effectively prepare for what will likely be a residency audit twelve to eighteen months after you file a New York or New Jersey non-resident return or no state tax return.

Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2018.  Note that these are not the official figures to be released by the IRS, but should be used as a guide.  The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2017, the applicable exclusion was increased from $5.45 million to $5.49 million.  This change increased 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 $10.98 million estate, gift and GST tax free to their children and grandchildren in 2017.  The projected 2018 adjustment to the applicable exclusion will increase from $5.49 million to $5.6 million which means that a husband and wife with proper planning could potentially transfer $11.2 million estate, gift and GST tax free to their children and grandchildren in 2018.

For 2017, the estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.  For gifts made in 2018, the projected gift tax annual exclusion will be adjusted to $15,000 (up from $14,000 for gifts made in 2017).

The New Jersey Estate Tax repeal will be effective as of January 1, 2018.  The current $2 million exemption which increased on January 1, 2017 is set to be eliminated as of January 1, 2018.  Keep in mind that the New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.

The New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion has increased as follows:

•           $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;

•           $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;

•           $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;

•           $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

In 2017, the gift tax annual exclusion to a non-citizen spouse was increased from $148,000 to $149,000.  This is projected to increase to $152,000 in 2018.  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.

On August 17, 2011, New York Governor Andrew Cuomo signed legislation that substantially revises New York’s trust decanting statute, NY EPTL 10-6.6.  New York was the first state to enact a decanting law in 1992.  The statute offers one effective method to revise or update otherwise irrevocable trusts.  The revisions to the statute significantly expand its scope, including the following changes:

“Absolute discretion” standard expanded.  Under the old New York law, the trustee had to have “absolute discretion” to invade the trust principal in order to be able to decant the trust.  The new law relaxes this requirement.

Under the new law, if the trustee has “unlimited discretion” to distribute the trust principal, the trustee may decant the trust in favor of one or more of the trust beneficiaries, to the exclusion of others.  Similarly, the remainder beneficiaries of the new trust can be one or more of the remainder beneficiaries of the old trust, to the exclusion of others.

For example, if a trust permits distributions to any of four children for the “best interests” of any of them, the trustee could decant the entire trust in favor of only one of the children.  The rationale is that such a distribution falls within the trustee’s broad discretion under the terms of the trust.

If the trustee does not have “unlimited discretion” – for example, the trust only permits principal distributions according to a “health, education, maintenance and support” standard – then the trustee still may decant the trust, but the beneficiaries of the new trust must be the same as the old trust, and the new trust must contain the same standard regarding principal distributions.

Notification.  The revised New York decanting statute still requires that all interested parties be notified of the changes to the trust.  In addition, the revised statute provides that, unless the beneficiaries consent, the decanting will become effective 30 days after service of notice.
Feel free to contact us if you have any questions about the pros and cons of decanting a trust, or the application of New York’s decanting statute.

We were alerted by one of our blog readers last week to a Wall Street Journal editorial published on February 8 stating that, from an estate tax perspective, New Jersey is the worst state in which to die. The article explains that up to 54% of a New Jersey decedent’s wealth could be lost to estate taxes in 2011 (New York decedents would lose 45.4%). While we disagree with some of the factual assertions set forth in the article (including that the state death tax deduction is new in 2011 – it is not and has been in place since 2005), we agree with the larger point that state estate taxes should be a significant concern for New Jersey (and New York) taxpayers.

With the federal estate tax exemption at $5 million per person in 2011 and 2012, the margin between the New Jersey exemption ($675,000) and the New York exemption ($1 million) has widened appreciably. The consequence is that for married taxpayers who want to take advantage of the first spouse to die’s full federal exemption and pass $5 million to their beneficiaries (for example, to an exemption trust for the benefit of the surviving spouse and/or children), then without special planning, a New Jersey/New York estate tax of approximately $391,600 would be due. Parties must consider whether it is worthwhile to pay some state level estate tax in the first spouse to die’s estate, especially in light of the fact that beginning in 2011, a married decedent’s federal estate tax exemption is portable, meaning the surviving spouse can use the first spouse to die’s unused estate tax exemption amount.

A number of variables factor into the decision, including: (1) the size of the surviving spouse’s estate; (2) all appreciation of the assets owned in the exemption trust will pass free of federal and state estate taxes in the future; (3) the current law is in place for two years, and as a result, the federal exemption amount could be reduced and estate tax rates (currently 35%) could be increased; (4) the age of surviving spouse; and (5) future plans of the surviving spouse, who possibly could move to a state with no estate tax (ie, Florida).

All of these decisions lead to another point. Estate plans need to be drafted in a very flexible manner to enable different decisions to be made depending on each taxpayer’s individual circumstances. It is not appropriate in this tax environment to have an inflexible plan.

The IRS and New Jersey Division of Taxation have extended this year’s tax return filing deadline for residents of 12 New Jersey counties due to the flood emergency in the state.  Residents of these counties now have until May 11, 2010 to file their returns.

See the IRS Press Release on this topic by clicking here.

See the NJ Division of Taxation announcement by clicking here.

The extension applies to residents of Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties.