New Jersey is not giving up its fight against the Tax Cuts and Jobs Act’s $10,000 cap on state and local tax deductions.
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This week, the state’s Democratic Gov. Phil Murphy signed a new workaround into law. The law allows small businesses – classified as pass-through entities, proprietorships and partnerships – to circumvent the cap by allowing them to pay their income taxes at the entity level. The TCJA cap applies to income taxes paid by individuals, which is normally how pass-through entities have paid since the early 1990s.
The new measure would also apply to law firms, medical groups and accounting firms.
The bill is expected to save 80 percent of New Jersey’s small businesses a collective $35 billion in state income taxes.
New Jersey joined three other states in suing to have the SALT cap overturned – a suit that was dismissed by a judge last year. The four states filed a notice of appeal at the end of 2019.
Other efforts to allow residents to circumvent the cap have been squashed by the IRS.
Meanwhile, Democrats in the House are pursuing their own effort to overturn the cap. The bill would repeal the provision in 2020 and 2021 and – in the meantime – the cap for married couples would be doubled to $20,000 in 2019.
The changes would be paid for by raising the top income tax rate on the wealthiest individuals to 39.6 percent, from 37 percent, which would restore it to pre-Tax Cuts and Jobs Act levels. Further, it would lower the income threshold for people who would be exposed to the top rate. Both of those changes would stay in effect through 2025.
As previously reported by FOX Business, New Jersey had the highest number of outbound migrations of all 50 states last year – at a rate of 68.5 percent. And the highest percentage of residents that left the state were wealthy, with nearly half of all outbound migrations occurring at income levels of $150,000 or more.