The New Millionaire’s Tax… Applies To Who Exactly?

The New Millionaire’s Tax… Applies To Who Exactly?

Looking to create additional tax revenue to offset the losses from the pandemic and provide additional relief, New Jersey has opted to implement a “Millionaire’s Tax”.

Does the millionaire’s tax affect all millionaires?

New Jersey has a lot of millionaires, with some estimates showing over 250,000 households with over a million dollars in investable assets. This tax rate increase is a change to one income tax bracket, which would only affect households with over 1 million dollars in income in a single year. The New York Times reported that the tax is estimated to affect 16,491 New Jersey residents and 19,128 nonresident taxpayers, so most millionaires will not be affected.

Who will the millionaire’s tax apply to?

The term itself is not being used consistently among states, but is generally associated with have a different rate for taxation of income above a million dollars in a single year. One may try to make a direct comparison to our New England neighbors that have a special tax bracket for millionaires, and would find that their definitions are quite different:

In Connecticut, the top tax rate of 6.99% applies to joint filers for income above $1 million. For individual filers, one need only reach the threshold of $500,000 to enter the top millionaire’s bracket.

In New York, the top rate of 8.82% applies to joint filers with income above $2,155,350, so single filers enter the top range at $1,077,500.

What about New Jersey?

New Jersey has 7 marginal tax brackets for individuals and 8 marginal tax brackets for joint filers, ranging from 1.4% to 10.75%. For most taxpayers, the difference in tax burden is not consequential when comparing filing individually to jointly, because the combined incomes have the same marginal rate: the tax rate for 40-75K bracket for individuals is 5.525% and the same rate of 5.525% would apply for income 80-150K bracket filing jointly. However, once you get to the $500K bracket entry point is the rate is the same for both types of filers – 8.97%. A table of the rates can be found on New Jersey’s State website here.* Thus, for New Jersey, the top “millionaire’s tax” rate will apply to either single or joint filers with over $1 million in income.

*Note that this table doesn’t incorporate the new 2020 millionaire’s tax at the time of this writing. The new millionaire’s tax brings the starting point for the top rate of 10.75% down from $5 million to $1 million, and does not affect the table for rates under that point.

How much is the new millionaire’s tax?

The new millionaire’s tax is currently estimated to collect 390 million additional dollars in tax revenue by increasing the tax rate for income between 1 and 5 million by 1.78%. That means the income below 1 million will not be affected, and the income above 5 million will not be affected. Each million dollars of income in between will have and increased tax liability of $17,800. Here’s a quick table to illustrate:

Amount of IncomeIncreased Tax Liability
1 million$0 (minimum)
2 million$17,800
3 million$35,600
4 million$53,400
5 million$71,200 (maximum)
10 million$71,200

What will the funds from the new tax be used for?

The large majority of the funds are slated to provide a tax rebate of $500 to families with at least one child and less than $150,000 of income for joint filers and less than $75,000 for individual filers. It’s estimated that 800,000 households will be eligible for the rebate.

Should additional tax planning be considered?

Because the Tax Cuts and Jobs Act of 2018 has capped the SALT (State and Local Taxes) deductions at $10,000, there won’t be as much relief from the increase on the federal side as there may have been in years prior. New Jersey is also very strict regarding deductions that could lower your adjusted gross income, limiting tax planning opportunities.

However, if you expect to be in a higher tax bracket later on, it might be worthwhile to consider rolling over your traditional IRA into a Roth IRA and paying the taxes on that income ahead of the shift. This may not be appropriate for all situations, so please consult your tax professional.

Beyond the implications of this particular tax, our professionals at Garden State Trust Company would be pleased to meet to discuss year-end tax planning, and we can a coordinate with your preferred tax professional for a collaborate team approach. We’re pleased to take as large or small a role as you see fit to help create your families’ financial security.