New Jersey employers can breathe a sigh of relief, as Governor Christie has announced that new fiscal management practices have brought New Jersey’s Unemployment Insurance Trust Fund into solvency for the first time since 2009. This spares businesses from a drastic tax surcharge, as Federal Unemployment Tax (FUTA) was set to increase from the base rate of 0.6% ($42 maximum per employee) to 1.5% ($105 maximum per employee). The surcharge is imposed when a state has borrowed from the Federal Unemployment Trust Fund and increases each year. In 2012, NJ employers paid 1.2% due to the surcharge ($84 maximum per employee). By repaying the loan to the Feds, employers will not be subject to this surcharge on their 2013 FUTA wages and will only pay the base rate of 0.6% ($42 maximum per employee).
TAX TIPS FOR INDIVIDUALS
Hit by the NJ Exit Tax for Selling Real Estate? Recover Your Money Quickly
If you’re a non-resident selling investment real estate in New Jersey, there’s a unique NJ tax you should be aware of. Both residents and non-residents always had to pay income tax on the gain upon the sale of real estate. This tax is required to be withheld for non-residents. The “Exit Tax”, which came into law six years ago, requires the seller to file a GIT/REP form (Gross Income Tax form) in order to record a Deed for the transfer of his property. When a non-resident sells the property, New Jersey will withhold this income tax in the amount of either 8.97 percent of the profit or 2 percent of the total selling price, whichever is higher. Therefore, even if the property is sold at a loss, tax must be withheld to fulfill the two percent requirement.
You Can Recover Your Money
It’s important to realize that while the Exit Tax requires a substantial withholding, it doesn’t have any impact on the tax liability. When the seller eventually files his NJ tax return he is refunded the difference between what was withheld and what was owed. This recovery can be very significant when one factors in the selling costs and original purchase price, both of which reduce the taxable gain.
Estates Often Recover Most if Not All of the Tax Withheld
The recovery is often even greater in the case of real estate sold by an estate, as there is a step up in cost basis which would typically minimize a gain on the sale, often resulting in full recovery of the entire withholding. If a taxpayer has excess withholding it would be prudent to file Form NJ1040 (individual) or NJ1041 (estate) quickly to expedite the recovery of the excess withholding.
So who’s considered a “resident” and who’s a “non-resident” with regard to this tax? The law defines a resident taxpayer as one of the following:
- An individual who is and intends to continue to maintain a permanent place of abode (home, residence) in New Jersey on/after the day of transfer
- An estate established under the laws of New Jersey
- A trust established under the laws of New Jersey
A nonresident is simply defined as “any taxpayer that does not meet the definition of resident taxpayer.”
It’s Official: IRS Allows Gay Couples to File Joint Tax Returns
As predicted after the Supreme Court’s ruling on the Defense of Marriage Act (DOMA) in June 2013, the IRS has announced that the government will be issuing regulations that will allow same-sex couples to file joint tax returns. This will pertain only to the 13 states that recognize same-sex marriage (New Jersey isn’t one of them). They will also be allowed to move freely throughout the country and their filing status will not change.
Owe NY Taxes? It Could Cost You Your Driving Privileges
Ignoring a tax debt could cost you more than you might think. Approximately 16,000 delinquent New York taxpayers were recently informed that their driving licenses will be suspended if they don’t pay up. Businesses or individuals who owe less than $10,000 will not be affected. New York is following the lead of California, which passed a similar law in October 2011.
Tax Tips for Families with Special Needs Children
Parents of a special needs child face many challenges, not the least of which is the high costs of providing care. Unfortunately, many are unaware that they may be eligible for several tax benefits that can offset some of those expenses. This can result in hundreds, if not thousands of dollars in tax savings. The following are a few key benefits:
- School Expenses – Ordinarily costs related to providing for a child’s education are not deductible. Not so, however, with special needs children. The unreimbursed cost of attending a “special school” for a neurologically or physically handicapped individual is deductible as a medical expense. The only stipulation is that the principal reason for enrolling in that school must be to alleviate the handicap through the school’s resources. The deductible expenses associated with the special school include amounts paid for lodging, meals, transportation, as well as the cost of ordinary education that is incidental to the special services the school provides.
- Conferences and Seminars- Parents and guardians of special needs children often attend medical conferences and seminars to educate themselves about their child’s disability. Provided the conference deals specifically with the child’s medical condition, the cost of the conference is deductible as a medical expense.
- Earned Income Tax Credit- The earned income tax credit, a credit designed to encourage the economically disadvantaged to work. It can amount to as much as $6,044 in 2013. The amount of this credit rises incrementally with the number of children one claims. Normally there is an age limit to qualify for this credit, but not for severely disabled children. They can be claimed as “qualified children” even into adulthood.
Are you in Business or is it Just a Hobby?
Whether an activity is classified as a business or a hobby can make a significant difference when it comes to taxes. Hobby losses are subject to “hobby loss rules”, under which the deductible expenses are limited to the amount of income generated by the activity. Even the expenses that can be deducted are subject to a 2% of adjusted gross income (AGI) floor. Deductions from business activity income, however, may exceed income and are fully deductible.
To illustrate, let’s suppose John, a photographer, decided to start a side business, taking pictures at weekend weddings. He earned $4,000 and incurred travel expenses of $3,000 and supply expenses of $2,000. If John’s side job is classified as a business activity he may deduct both expenses to arrive at a $1,000 loss. If it’s classified as a hobby, however, he may only deduct expenses to the extent of his earnings $4,000(assuming those expenses exceed the 2% of AGI floor), and no loss would be allowed.
While the difference is clear in terms of the tax ramifications, whether or not to classify an activity as a hobby is a rather complex matter.
For an activity to be considered a business, it must be engaged in for profit. How will the IRS determine the intent of the business owner? Here are several factors they consider:
- How the activity is handled – To be considered a business an activity must be conducted in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, and keeping records and books, maintaining a website
- Historic performance- A long streak of losses indicates a hobby, whereas sustained earnings indicate a for-profit activity
- Nature of the activity- If the activity can provide some sort of recreation or other personal motive, it points to hobby status. If, however, there is no conceivable personal motive it points to business activity
These are only a few of many factors the IRS may consider. We recommend that you consult with a tax professional to determine the proper classification of your business activity.