This year the entire day was devoted to state tax issues. The morning started off with an introduction to the new Acting Director of the NJ Division of Taxation, Michael Bryan. Let me say that for the first time in many years I have hope for the NJ Division of Taxation. Mr. Bryan was followed by brief presentations on tax law changes for NJ’s neighbors – Pennsylvania, Delaware and New York – followed by a panel discussion where each state, NJ included, described how it would handle specific client tax situations.
The afternoon was devoted to New Jersey corporate and individual taxes and the state’s “property tax relief” programs – the annual “Jim and Jake Show”, so-called because of the two excellent NJDOT speakers Jim Gordon and Jacob Foy who have been a fixture, and usually the highlight, of the NJNATP annual state tax seminars for quite a few years now.
For a complete “review” of the day check out my Monday post “1” at THE NJ TAX PRACTICE BLOG.
Perhaps the most important item of the Jim and Jake show was the explanations of the New Jersey Homestead “Benefit” (no longer Rebate) and New Jersey Property Tax Reimbursement (aka “Senior Freeze”) programs for 2011.
FYI, NJ homeowners and tenants did not receive any Homestead rebate or benefit in calendar year 2010. Senior and disabled tenants who did not have to file Form NJ-1040 for 2009 did receive a $50.00 check in 2010 – but this was a payment of the “Property Tax Credit” and not a tenant rebate.
First off – there is no more tenant rebate or “benefit”, regardless of age or health. Tenants will get no “benefit” in 2011. As was the case in 2010, senior and disabled tenants who do not file a 2010 NJ-1040 will receive a $50.00 “Property Tax Credit” check if they file the new NJ-1040-H form that is included in the 2010 NJ-1040 package (replacing the TR-1040 form).
Qualified homeowners under age 65 and not disabled won’t receive a benefit in 2011 if their 2009 NJ Gross Income (Line 28 on the 2009 NJ-1040) was over $75,000. Those age 65 or older and/or disabled get no benefit if their 2009 NJ Gross Income is over $150,000.
The NJ Homestead rebate check of past years has been replaced with a credit against the actual tax bill issued by the qualified homeowner’s municipality. The credit will appear on the municipal tax bill for the 2nd quarter of 2011 – the bill whose payment is due on May 1, 2011. Municipalities will be mailing out corrected 2nd Quarter 2011 tax bills to homeowners sometime before May.
This idea was, I believe, first proposed by former Governor Corzine at the beginning of his tenure, before he lost his testicles and sat back and let the ethically-challenged state Democratic Party leaders continue to run the show. I am very pleased to see Governor Christie decided that this method of delivery is the proper way to go.
From a federal income tax point of view this way of distributing the “benefit” is “more better”. When a taxpayer receives a refund of an item that was deducted on the previous year’s tax return, such as with a state income tax refund or the former Homestead Rebate, the refund is reported as income on Page 1 of the Form 1040. There is a specific memo from either the IRS or NJDOT that indicates this is the proper treatment of the NJ Homestead Rebate check.
Reporting a rebate or refund as income on Page 1 increases the taxpayer’s Adjusted Gross Income (AGI) and can therefore reduce a multitude of deductions and credits that are phased-out or eliminated based on AGI, and can also cause more of a retiree’s Social Security or Railroad Retirement benefits to be taxed.
If the benefit is provided as a credit against actual real estate tax billed and paid during the year, the taxpayer simply claims the reduced amount paid as a deduction on the current year’s Schedule A. The taxpayer’s AGI is not increased – his/her net taxable income is.
Jacob Foy explained how the “benefit” qualified homeowners will receive in 2011 will be calculated.
The benefit to be distributed in 2011 is actually the 2009 NJ Homestead Benefit. The application forms were sent out in September 2010 and the deadline for submitting the application was eventually extended to January 3, 2011. The benefit for 2011 is based on where one lived on October 1, 2009.
Step One - You begin with the tax assessed - and paid - on the property that you owned and lived in on October 1, 2009 for calendar year 2006, whether or not you actually lived in that house in 2006. If the house you owned and lived in on October 1, 2009 was not built in 2006 the state will estimate the tax that would have been paid on the home based on the property’s current assessed value and the municipality’s 2006 property tax rate.
The property tax is capped at $10,000. If the 2006 tax on the qualifying property was $11,500 the benefit is based on $10,000.
Step Two- Multiply the 2006 property tax by a percentage – depending on status and income.
For those age 65 or older and/or disabled if 2009 NJ Gross Income was -
Not over $100,000 = 20%
Between $101,001 and $150,000 = 10%
For those under age 65 and not disabled –
Not over $50,000 = 20%
Between $50,001 and $75,000 = 13.34%
Step Three - The amount of 2009 NJ Homestead Benefit you will receive as a credit on your May 1, 2011 tax bill is one-fourth (1/4), or 25%, of the amount determined in Step Two.
Let us say you are not 65 or older or disabled. Your 2006 property tax was $4,200 and your 2009 NJ Gross Income was 63,700. Your 2009 NJ Homestead Benefit, the credit that will appear on your revised property tax bill, will be $140.07, determined as follows –
$4,200.00 x 13.34% = $560.28 x 25% = $140.07.
The maximum 2009 NJ Homestead Benefit is $500.00 ($10,000.00 x 20% = $2,000.00 x 25% = $500.00).
Some people will actually receive a “benefit” check in the mail, or via direct deposit, in 2011. You will get a check if –
(1) You are a qualified homeowner who lived in a co-op or continuing care retirement community on October 1, 2009 (where the actual tax bill is sent to the co-op association or community and the owners pay their share of the tax, based on their individual unit of ownership, to the co-op association or community), or
(2) You indicated on the 2009 NJ Homestead Benefit application that you no longer own the qualifying property.
If you sell the qualifying property after submitting your benefit application and before paying the 2nd quarter tax bill you are somewhat screwed. If you indicated on the application form that you still owned the property the credit will stay with the property.
Let’s say you submitted your 2009 application back in October of 2010 and indicated that you still owned the property. In February of 2011 you sell the property. The Homestead Benefit to which you are entitled will still appear as a credit on the 2nd Quarter 2011 property tax bill from the municipality – so the new owner will get your benefit. Do you think that the new owner is going to send you a check?
In such a situation you should be sure to include an adjustment on the Closing Statement for the 2009 NJ Homestead Benefit that you, the seller, are entitled to but will not receive. If, as in the example from above, you are entitled to a $140.07 benefit you should receive an additional $140.07 from the buyer at closing.
Information on the 2009 NJ Homestead Benefit is available on the NJ Division of Taxation website. Click here.
The 2010 NJ Property Tax Reimbursement, to be paid in 2011, which is for qualified homeowners age 65 or older or disabled only, is even more complicated. I will discuss this here at TWTP on Thursday.