Friday, May 29, 2009


A comment from Lynn on yesterday’s post “A FLAT TAX FOR NJ – SOUNDS GOOD TO ME!”, which I have published, included a request for clarification on how a 2.98% on the first dollar would work.

Can you explain what it means when there is a flat tax on the first dollar of income earned? Does that mean I will only pay 2.98% of $1.00? Of course it can't mean that. I could only wish. I wouldn't mind a flat tax on 2.98% of all income. How would that work for those of us that work in NYS? I wish they would come up with an easier tax return. I hate the NJ 1040 since I work in NY and my husband works in NJ.”

The Lonegan for Governor website page on the
Flat Tax does not provide any examples of the application of the tax. I assume it will work similar to Pennsylvania’s flat tax system. Sol, Lynn, here is how it would work, based on the existing Pennsylvania tax system.

You have W-2 income of $50,000, interest and dividends of $1,000, and a $2,000 net capital loss from the sale of securities. Your NJ state taxable income would be $51,000. Since, as is already the case with the NJ-1040, losses in one category of income do not reduce income in other categories, the $2,000 net capital loss would be “lost” and you would only be taxed on your combined positive income of $50,000 + $1,000.

There would be no deduction for personal exemptions or, and here I am not sure, medical expenses or property taxes (actual or, as with a tenant, assumed). Your tax would be $51,000 x 2.98%, or $1,520. Under the current NJ system the tax would be $1,220 (assuming the $50 Property Tax Credit instead of a Property Tax Deduction and no medical expenses) for a single filer.

I do not know how the new flat tax system would handle pension income and the Retirement Income Exclusion. I do believe that PA does not tax pensions.

So I assume that you would take the New Jersey Gross Income reported on Line 28 of the NJ-1040 and simply multiply it by 2.98% to determine your NJ tax.

FYI under Lonegan’s plan the flat rate would decrease to 2.5% the following year, and further to 2.1% in the third year. So in the above example the tax would be less than the current NJGIT in the third year - $51,000 x 2.1% = $1,071.

I certainly expect that there would continue to be a credit for taxes paid on the same income to other states. So if the $50,000 was earned, and already taxed, in New York State a credit would be allowed on the NJ state return.

New Jersey and Pennsylvania have a reciprocal agreement. Residents of NJ are not taxed by PA on wages earned in Pennsylvania, and residents of PA are not taxed by NJ on NJ source wages. If you live in New Jersey and work in Pennsylvania your employer should not be withholding PA state income tax from your wages. He should be withholding New Jersey Gross Income Tax. It is the same if you live in Pennsylvania and work in New Jersey – PA state income tax should be withheld. There is no similar reciprocity for business income or other types of state-specific sourced income.

This will never happen with New York and New Jersey. Since New York’s state income tax is for the most part higher than that of New Jersey no NYS legislature would ever agree to reciprocity.

Any more questions?


1 comment:

Lynn said...

Thanks for the explanation. I assumed that is how it would work but I was just confused at the first dollar thing. I don't have my 2008 tax return in front of me but I am assuming that this is going to help higher incomes and hurt lower incomes? Especially if NJ raises their highest tax bracket and removes the prop. tax deduction. Last year I think we made about 160K gross according to NJ and this year it will be about 30K higher. About 60% of our money was made in NJ last year and this year it will be closer to 50% with the rest in NY. I expect to pay owe more to NJ this year since we pay $8600 in property tax and will most likely pay taxes on it this year.(I probably should adjust our withholding) I love to pay tax on the taxes we pay!