October 6, 2020 New Jersey reinstates the higher personal income tax rate for millionaires retroactive to January 1, 2020; employers must adjust withholding effective immediately New Jersey Governor Phil Murphy announced that he signed revised fiscal year (FY) 2021 budget bills into law on September 29, 2020, that reestablishes the higher millionaire's personal income tax rate that expired in 2010. The law also provides an income tax rebate for certain taxpayers. (A10, Chapter 94.) The New Jersey Division of Taxation subsequently issued a notice instructing employers that effective immediately they must withhold New Jersey state income tax at the rate of 21.3% from salaries, wages and other remuneration in excess of $1 million, but not in excess of $5 million. This higher income tax withholding rate will allow New Jersey taxpayers affected by this retroactive personal income tax rate increase to "catch up" on their withholdings for the year since the law is retroactive to January 1, 2020. The Division states that it will not impose interest or penalties for insufficient payment of estimated tax and/or withholdings that may be due before September 29, 2020, if the underpayment is a result of the increased personal income tax rate. Revised 2020 income tax withholding tables are available here. Reinstating the millionaire's personal income tax rate Effective retroactively to January 1, 2020, the tax threshold for the current 10.75% marginal personal income tax rate imposed on taxable income over $5 million will also be imposed on taxable income above $1 million. This change is expected to raise $390 million in fiscal year FY 2021. The marginal gross income tax rate under previous law was 8.97% for income between $1 million and $5 million, and 10.75% for income over $5 million. According to the governor's announcement: "The revised budget the Governor unveiled last month laid out a series of solutions to help close a roughly $5.28 billion budget gap and protect many shared priorities. Together, Governor Murphy and legislative leaders reached an agreement that builds upon that proposal while securing a significant victory for middle and working-class taxpayers by restoring the full millionaire's tax and delivering sizable tax rebates to approximately 800,000 New Jersey families." Taxpayer rebate Beginning with tax year 2020, and subject to appropriation by the state legislature, A10 also provides a tax rebate to eligible gross income taxpayers of either $500 or, if the taxpayer had a gross income tax liability of less than $500, the amount of actual tax paid. To be eligible for the rebate, the taxpayer must be a resident of the state, have at least one dependent child, have a gross income tax liability greater than zero, and have gross income not exceeding either:
The New Jersey Office of Legislative Services estimates that the rebate program will cost the state at least $300 million annually, starting in FY 2022. It is expected that up to 800,000 qualified taxpayers will be eligible for the rebate. The Division of Taxation will issue rebates to eligible taxpayers between July 1 and July 31 of the subsequent tax year, or between July 1 and December 31 of the subsequent tax year for taxpayers who were granted gross income tax return extensions. Ernst & Young LLP insights New Jersey does not allow for a flat rate of withholding on supplemental wages. Employers that use the highest marginal tax rate in computing withholding on bonuses and other supplemental wages should consider that, for the remainder of 2020, the highest withholding rate is 21.3% for remuneration in excess of $1 million, but not in excess of $5 million. For information about 2020 changes in the New Jersey corporate income tax, see EY Tax Alert 2020-2356. ———————————————
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