July 13, 2018 New Jersey overhauls Gross Income Tax, increases top marginal rate and withholding percentage, provides contingent carried interest surtax On July 1, 2018, New Jersey Governor Phil Murphy signed into law New Jersey Assembly Bill No. 3088 / Senate Bills 64, 1515 and 2407 (the Law), which modifies the New Jersey Gross Income Tax (GIT) Act (i.e., New Jersey's personal income tax) by increasing the top marginal GIT rate and employer withholding requirement and imposing a contingent 17% surtax on carried interest. Below is a summary of these changes. The Law also expands the earned income tax credit, provides a dependent care credit and increases the property tax deduction from $10,000 to $15,000. For more on these changes, see Tax Alert 2018-1373. Increased top marginal GIT rate Effective for tax years beginning on or after January 1, 2018, the Law increases the top marginal GIT rate on income over $5 million from 8.97% to 10.75%. All other rates below the top marginal rate remain the same. Employer withholding requirement For tax year 2018, the Law requires employers to withhold from compensation over $5 million at a rate of 15.6%, as soon as practicable, but no later than September 1, 2018. The Law provides penalty and interest relief to employers to the extent that insufficient withholding on compensation received before September 1, 2018, is due to the Law's effects. Contingent carried interest income surtax The Law authorizes a 17% surtax on investment management services (i.e., carried interest), contingent upon passage of identical legislation in Connecticut, Massachusetts and New York. Investment management services are defined as "providing a substantial quantity of any of the following services to a partnership, S corporation, or any other entity as a partner thereto: (a) Advising on investing in, purchasing, or selling a specified asset; A partner will not be considered providing investment management services if the partnership interest is held directly or indirectly by a corporation or by any capital interest in the partnership that provides the taxpayer with a right to share in partnership capital commensurate with the amount of capital contributed, determined at the time of receipt of such partnership interest, or the value of partnership interest subject to tax under IRC Section 83, upon the receipt or vesting of such interest. Implications The Law increases the top marginal tax rate for certain high income taxpayers by nearly 20%, and nearly doubles the withholding tax rate upon top marginal income that exceeds the actual marginal tax rate. Affected taxpayers should be made aware of the additional tax and withholding requirements as soon as possible to properly prepare for the immediate impact on available cash. In addition, taxpayers in the financial industry should monitor the development of carried interest surtax legislation similar to New Jersey's in other states, most notably Connecticut, Massachusetts and New York. Enactment of similar legislation in these states would trigger the implementation of the New Jersey carried interest surtax. ———————————————
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