'Exit Tax' before retiring, selling house in New Jersey

By Karin Price Mueller/The Star-Ledger  Q. I plan to retire in 2013, sell the house and move out-of-state. My house is currently worth about $1 million and I am wondering if the house sells for more, how this so-called "NJ Exit Tax" is calculated. Can you please clarify what this tax is all about and what the tax-rate will be? What is the basis for the tax (sales price minus original price?), how do home improvements (pool, new deck, fence, renovations) and replacement costs (air conditioning, water heater) impact the tax?

— Califon Curious

A. There are several charges called "taxes" that you may be asking about.

First, the charge known as an "exit tax," the tax paid by a non-resident who sells a property located in New Jersey, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton.

New Jersey also has transfer taxes paid by a seller who sells a home in New Jersey, regardless of whether they are a resident or not. And, New Jersey has a "mansion tax" for homes sold in excess of $1 million, Hook said. This tax is equal to 1 percent of the price, but this fee is paid by the purchaser, not the seller of the home.

Back to the "exit tax." 

Hook said this is not really an additional tax, but it’s an estimated tax payment required to be paid by someone who is a non-resident who sells real property located in New Jersey in advance of the actual tax calculation on the sale, he said.

"The amount of the payment is equal to the highest rate of tax in New Jersey in the year of sale multiplied by the gain on the sale," Hook said. "The gain on the sale is calculated the same as on a federal tax return, which is, in simple terms, sales price less adjusted basis, which is the purchase price plus improvements less depreciation taken."

This payment is then shown on the taxpayer’s Non Resident New Jersey Income Tax Return as a prepayment against any tax calculated when filing the New Jersey return.

Hook said the purpose of the "exit tax" is to ensure that New Jersey does not get stiffed on taxes because the non-resident isn’t in the state.

"It would be costly if New Jersey had to track down non-residents who owed taxes on these sales," he said. "Instead, requiring that this estimated tax be paid before a deed can be recorded ensures that New Jersey receives the tax revenue."

Hook said the home improvements you mentioned would add to the basis of the property and thus reduce the tax owed on the tax return. It may or may not reduce the estimated tax payment, however, because New Jersey law requires a minimum of 2 percent be paid in as an estimate on the sales price. Because of this minimum, Hook said, the taxpayer may wind up with a refund once they file the actual New Jersey Non Resident Tax Return.

For further information about this tax you can download NJ Publication TB-57 from the Division of Taxation’s web site. 

Complicated U.S. Tax Code Hits Players During NFL Playoffs

Kurt Badenhausen, Forbes Staff writes: The only time NFL players are seen as equals, from kickers to quarterbacks, is during the playoffs…at least as far as compensation is concerned. Article 37 of the NFL’s Collective Bargaining Agreement establishes playoff shares for players competing in the postseason. Each player earns the same income as his teammates for as long as his team is alive.

This year, wild card players earned $20,000 for the first round of the playoffs, while division winners who participated in that round made $22,000. In the divisional round this past weekend, all players made $22,000. Next weekend, they will bring in $40,000. The Super Bowl winners will receive $88,000 while the losers will earn $44,000. As a tax accountant for athletes, I am often asked how this money is taxed at the state level, seeing as how most states have a jock tax. The answer is not as simple as it seems.

Conventional thought is that the state hosting each playoff game will tax the full value of the playoff share. This sounds logical, but it fails to consider practice days leading up to the playoff game, which are work days during which players earn part of that money. It also misses the fact that states determine taxable income based on W-2 income for the whole year. Most players will practice and play during 2013, the same year in which the playoff shares are paid.

To illustrate how players are taxed, let’s assume that retiring legend Ray Lewis will ride off into the sunset carrying the Lombardi Trophy. The Ravens’ first playoff game was at home. Lewis’ playoff share would have been fully taxable in Maryland had they lost. Since the playoffs occur in the new year, he could have chosen to maximize his 401(k) contribution, meaning that instead of $22,000 being taxed to Maryland, only $4,500 would have been taxable.

The Ravens won their first game and earned the right to play some road games, but that complicates the tax picture. Lewis earned another $22,000 inDenver this weekend and will make $40,000 in Foxborough next weekend when the Ravens take on the Patriots. If they win the Super Bowl, Lewis will receive $88,000 in New Orleans, along with a Super Bowl ring worth about $20,000 (the value of the ring is taxable). All told, Lewis could have $192,000 in taxable earnings in 34 days of services in 2013. This number reduces to $174,500 after his 401(k) deduction.

Each state is entitled to tax Lewis for the number of days he spent in its jurisdiction performing services for his team. Players typically arrive in town the day before road games for a walk-through and return home right after the game (two duty days). Thus, Massachusetts and Colorado will each tax Lewis on 2/34 of $174,500, or about $10,000 of income. Players will spend seven days in New Orleans for the Super Bowl, so Louisiana will tax 7/34 of his earnings, or about $36,000. Maryland taxes the remainder.

Since Lewis is retiring, his calculation is fairly simple. But consider Lewis’ teammate, Ray Rice, who will presumably remain with the Ravens next season. Rice will earn the same $174,500 during the playoffs as Lewis, but he is also slated to earn $1 million in base salary plus incentives of $1.75 million next season (ignoring any signing bonus due, which is usually only taxable in a player’s home state).

Assuming training camp begins July 19, Rice will perform 166 duty days during the 2013 season plus the 34 from the 2012-13 playoffs for a total of 200. Rice’s 2013 taxable income will be $2.925 million if he earns all of his incentives. This will be the baseline for taxing the playoff income he is currently earning. His Massachusetts and Colorado taxable income will be 2/200 of $2.925 million, or about $29,000; and his Louisiana income will be 7/200 of that amount, or about $102,000.

While this method of calculation seems wholly unfair to Rice as compared to Lewis, these are the rules as written in the states’ codes and regulations.  You can subscribe to Kurt Badenhausen on his Facebook profile. 

With New Capital Gain Tax Rates, Should You Buy or Sell? An Ernst & Young start-up tax advisor outlines a six-step approach to make the wisest financial decision for you

James Markham  for Inc. Now that all the talk about the fiscal cliff has ended, entrepreneurs are asking: 'Did I fall off the cliff or get hit by a car?'    With the new laws in place, you'll need to reassess to find out if you should adjust your individual and company tax strategies. If you didn't sell your company before 2013, your tax rates on future transactions are going to be higher. 

To determine the best buy or sell approach, you should follow these six steps:

Know your constituents.

If your company is owned directly by an individual or a family, or if it received capital from venture capital, private equity, or angel funds, will make a difference in how the new tax rates will be applied, and the best way for you to act. Know your constituents, and how the new tax changes affect each of them, before you proceed.

Learn the new tax rules.

The new capital gains tax rate increases from 15% to 20%, and combines with the new Health Care Act investment tax of 3.8%, which results in an overall rate of 23.8%. If you sell your stock now, you'll effectively pay 8.8% more tax on it than those who were able to complete a transaction in 2012.

At least you now have certainty about how much you'll pay in taxes. Tax rates will not change or sunset automatically in the future, they will only change by an act of Congress.

Run the numbers.

Once you know your constituents and the rules for each, you can do a straightforward calculation. Your capital gains, if you have any, will be taxed at 23.8%. A interesting benefit to the increased capital gain rate structure is that now, those leftover dot.com capital loss carryovers that you accumulated are now worth more (23.8% vs. 15% to the extent they can offset capital gains)! Constituents with potential capital losses and capital loss carryovers will now be more interested in triggering a transaction that would allow them to offset higher capital gain taxes.

Consider motives.

If venture capital, private equity, or angel investors are looking for an early exit, your hands could be tied, depending on how much control you gave up when outside capital came into the company. Venture capital and private equity funds have life cycles of their own. If a fund is near its end and those running it need to raise money for a new one, investors may push an entrepreneur to sell so they can show potential new investors a profitable liquidity event.

Weigh your own situation.

If you're an aging baby boomer entrepreneur, for instance, you may be finding the next generation has no interest in taking over your company. To solve a succession problem, you may opt to sell, which would present a strong opportunity for other entrepreneurial companies looking to grow--and manage higher capital gains tax rates.

Prepare to act. 

Reassess your new post fiscal cliff playing field to your advantage by knowing the new tax rules, your constituents' motives, and various tax scenarios. This knowledge could push you to sell--or buy.

Weekly Report from Washington, D.C. (January 7-11)

In a quiet week at the White House and Congress, President Obama nominated Jack Lew to be Treasury Secretary and Senate Republicans named new members of the Senate Finance Committee. The IRS, meanwhile, released the official 2013 tax rate tables, along with some inflation-adjusted items, and the corporate bond weighted average interest rate and announced that the 2013 filing season would begin for some taxpayers on January 30.

White House

President Obama announced on January 10 that he has nominated his Chief of Staff and former Budget Director Jack Lew to be Treasury Secretary, to succeed Timothy Geithner who has held the position for the past four years.

Congress

Senate Republican leadership named Sens. Johnny Isakson, R-Ga., Rob Portman, R-Ohio, and Pat Toomey, R-Pa., to serve on the Senate Finance Committee in the 113th Congress. The other Republican members of the Finance Committee for the 113th Congress are: Charles E. Grassley, Iowa, Mike Crapo, Idaho, Pat Roberts, Kan., Mike Enzi, Wyo., John Cornyn, Tex., John Thune, S.D., and Richard Burr, N.C.

IRS

Official 2013 Tax Rate Tables. The IRS has released several inflation adjusted items for 2013, including the 2013 tax rate tables, personal exemption amount and phaseout ranges, standard deduction, and more. The guidance lists several changes made by the American Taxpayer Relief Act of 2012, such as the expiration of the tax cut for certain high-income taxpayers who now fall within the 39.6-percent tax bracket, increased AMT exclusions, and the income threshold at which the limitation on itemized deductions kicks in.

Taxpayer Advocate Report to Congress. National Taxpayer Advocate Nina E. Olson has released her annual report to Congress, identifying the need for tax reform as the overriding priority in tax administration. She also expressed concern that the IRS is not adequately funded to serve taxpayers and collect tax, and she identified ways in which chronic underfunding hampers taxpayer service, impairs taxpayer rights and increases taxpayer burden.

Filing Season. The IRS plans January 30 as the opening day for the 2013 tax return filing season, meaning that it will begin accepting tax returns on that date. The vast majority of tax filers, more than 120 million households, should be able to start filing tax returns on January 30.

Corporate Bond/Interest Rate. For pension plan years beginning in January 2013, the IRS has released the corporate bond weighted average interest rate, the permissible range of interest rates used to calculate current plan liability and to determine the required contribution under Code Sec. 412(l) for plan years through 2013, and the current corporate bond yield curve and related segment rates for the purpose of establishing a plan's funding target under.

User Fee Schedule Correction. The IRS corrected a typographical error in the Schedule of User Fees found in Appendix A,  The procedure incorrectly lists the reduced user fee for a letter ruling, method or period change or closing agreement request involving a personal or business tax issue from a person with gross income of less than $250,000 as $1,000. The user fee is $2,000.

IRS Releases Annual Inflation Adjustments for 2013

IR-2013-4, Jan. 11, 2013

WASHINGTON — The Internal Revenue Service announced today annual inflation adjustments for tax year 2013, including the tax rate schedules, and other tax changes from the recently passed American Taxpayer Relief Act of 2012.  

The tax items for 2013 of greatest interest to most taxpayers include the following changes.

• Beginning in tax year 2013 (generally for tax returns filed in 2014), a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years. The guidance contains the taxable income thresholds for each of the marginal rates.

• The standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for tax year 2012.

• The American Taxpayer Relief Act of 2012 added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).

• The personal exemption rises to $3,900, up from the 2012 exemption of $3,800. However beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $250,000 ($300,000 for married couples filing jointly). It phases out completely at $372,500 ($422,500 for married couples filing jointly.)

• The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).

• The maximum Earned Income Credit amount is $6,044 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $5,891 for tax year 2012.

• Estates of decedents who die during 2013 have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012.

• For tax year 2013, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transit passes and transportation in a commuter highway vehicle is $245, up from $240 for tax year 2012 (the legislation provided a retroactive increase from the $125 limit that had been in place).

Details on these inflation adjustments and others are contained in Revenue Procedure 2013-15, which will be published in Internal Revenue Bulletin 2013-5 on Jan.28, 2013. Other inflation adjusted items were published in October 2012 in Revenue Procedure 2012-41.  Contact us here at ExactCPA if you would like further understanding of these changes.