Have you ever been asked the question, “When is a tax not really a tax?” Well the answer is, “When it is an exit tax – which is really a prepayment!” So, do you really know how the so-called NJ exit tax works?
When New Jersey residents sell their homes and prepare to move out of state, you must pay a standard tax rate on the profit from the sale. You need to pay this tax when you move, rather than at the time you would normally file your state income tax return. Because of the timing of the state tax requirement, this policy has been thought of as being an “exit” tax because it is paid upon “exiting” the state.
New Jersey originally passed this legislation under the guidance of former Governor Jim McGreevy. At the time, the objective was to ensure that anyone moving out of state could not do so without first paying taxes on income gained from the sale of their home.
Over the years, this concept has taken root in the state, with the result being that residents who are relocating believe they are paying an additional tax (what people call the NJ exit tax) on the sale of their homes as they move out of state.
Instead, it is really a prepayment of state taxes you they already owe, based on profit from the sale.
Despite the confusion caused by calling it an exit tax, the law simply requires the seller to pay state tax in advance, calculated as follows: New Jersey withholds either 8.97% of the profit or 2% of the selling price, whichever is higher.
This estimated tax is adjusted when the seller files a New Jersey tax return for the year of the sale. The seller must pay this tax prior to leaving the state, even if there is no gain from the sale. But the state takes all that into account once the year-end income tax is filed.
So, for example, if you lost money on the sale of your house, and 2% tax was prepaid before you left the state, you would receive a full refund when you file your New Jersey state income tax.
If you do realize a capital gain on the sale, it would be deducted from the estimated tax payment you have made when exiting and the remainder would be returned to you.
Although the prepayment obligation is an inconvenience for a seller moving out of New Jersey, the tax is refunded or reduced as appropriate at the time of filing.
Ken Bagner is a Member in Charge of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJSCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance in New Jersey.