How Much is the Exit Tax in New Jersey?

New Jersey does not have an explicit “exit tax” like some other states. The term “exit tax” often refers to a tax on the unrealized capital gains of high-net-worth individuals when they move out of a state. New Jersey doesn’t impose such a tax. However, that doesn’t mean leaving New Jersey is free from tax implications. You’ll still be responsible for New Jersey income tax on income earned while you were a resident and may face complexities regarding capital gains, property taxes, and estate taxes depending on your situation. This article will delve into these potential tax liabilities and provide clarity around what you need to consider when relocating from the Garden State.

Understanding New Jersey Residency and Tax Implications

When leaving New Jersey, it’s crucial to understand the state’s rules regarding residency and how they impact your tax obligations. Establishing residency elsewhere is a key factor in severing ties with New Jersey for tax purposes. However, the state isn’t always willing to let go easily.

Establishing Non-Residency in New Jersey

New Jersey defines residency based on a complex set of factors. Merely moving your belongings isn’t enough. The state looks at where you spend the majority of your time, where your business interests are located, where your family resides, and where you maintain important affiliations like bank accounts and club memberships. If New Jersey remains your “permanent home” in the eyes of the state, you could still be considered a resident for tax purposes, even if you live elsewhere.

Key indicators that you are no longer a New Jersey resident include:

• Physical Presence: Spending fewer than 183 days in New Jersey. Note that even spending a day in the state counts towards that total.
• Permanent Home: Establishing a permanent home outside of New Jersey and abandoning your former home. This means selling your New Jersey property or renting it out.
• Business Interests: Transferring your business interests outside of New Jersey.
• Family Ties: Moving your family to your new state of residence.
• Official Documents: Changing your driver’s license, voter registration, and bank account addresses to your new state.

Even if you meet these criteria, New Jersey may still challenge your claim of non-residency. This often happens when significant income is derived from New Jersey sources, such as rental properties or business operations.

Income Tax Implications

As long as you are considered a New Jersey resident, you are subject to New Jersey income tax on all of your income, regardless of where it is earned. This includes income from wages, salaries, investments, and rental properties, even those located outside of New Jersey.

Once you establish non-residency, you are only taxed on income sourced from New Jersey. This typically includes:

• Income from New Jersey-based businesses: If you own a business operating in New Jersey, the income attributable to the New Jersey operations is taxable.
• Rental income from New Jersey properties: Rental income from properties you own in New Jersey is taxable, even if you are no longer a resident.
• Wages for services performed in New Jersey: If you work in New Jersey, the wages earned while working there are taxable.

Capital Gains Implications

Capital gains are taxed in New Jersey at the same rate as ordinary income. When leaving New Jersey, it’s crucial to understand the implications for capital gains taxes on assets you own.

If you sell assets before establishing non-residency, the capital gains are subject to New Jersey income tax. This includes stocks, bonds, real estate, and other investments.

If you sell assets after establishing non-residency, the capital gains are generally not subject to New Jersey income tax, unless the assets are related to a New Jersey business or property.

The timing of your asset sales can significantly impact your tax liability. Consulting with a tax professional is recommended to optimize your tax strategy.

Property Taxes and Estate Taxes

While New Jersey doesn’t have an “exit tax” on unrealized capital gains, it’s important to consider property taxes and estate taxes when planning your move.

Property Taxes

New Jersey has some of the highest property taxes in the nation. If you own property in New Jersey, you will continue to be subject to property taxes even after you move out, unless you sell the property.

Property taxes are assessed annually by local municipalities. The amount of property tax you pay depends on the assessed value of your property and the local tax rate.

Selling your New Jersey property before moving can help you avoid ongoing property tax liabilities.

Estate Taxes

New Jersey previously had an estate tax, but it was phased out and repealed entirely for deaths occurring on or after January 1, 2018. This means that your estate will not be subject to New Jersey estate tax, regardless of when you move out of the state.

However, it’s important to note that the federal estate tax still applies. The federal estate tax is a tax on the transfer of property at death. The federal estate tax exemption is currently quite high, but it can change over time. Consulting with an estate planning attorney is recommended to understand the federal estate tax implications for your estate.

FAQs: Leaving New Jersey and Taxes

Here are some frequently asked questions about leaving New Jersey and the associated tax implications:

1. What happens if I move out of New Jersey mid-year?

You will be considered a part-year resident of New Jersey. You will be taxed as a resident for the portion of the year you lived in New Jersey and as a non-resident for the portion of the year you lived elsewhere, paying taxes only on New Jersey-sourced income. You’ll need to file a part-year resident tax return.

2. How does New Jersey determine residency for tax purposes?

New Jersey uses a multi-faceted approach, considering factors such as physical presence, location of your permanent home, business interests, family ties, and official documents. The state will look at the totality of your circumstances to determine whether you are a resident for tax purposes.

3. I still own a rental property in New Jersey after moving. Do I have to pay taxes on the rental income?

Yes, rental income from New Jersey properties is considered income sourced from New Jersey and is taxable, even if you are no longer a resident.

4. What if I work remotely for a New Jersey-based company after moving out of state?

If you are working remotely outside of New Jersey for a New Jersey-based company, your wages are generally not subject to New Jersey income tax after you establish non-residency. However, this can be a complex issue, and it is best to consult with a tax professional.

5. Does New Jersey have a “convenience of the employer” rule?

New Jersey does not have a “convenience of the employer” rule like New York. That rule asserts that if you work remotely for a NY-based company from out-of-state, the income can be taxed as if you were working in New York. This is generally not the case in New Jersey.

6. I am selling my New Jersey home. When is the best time to sell to minimize taxes?

Ideally, you should sell your New Jersey home after establishing non-residency. Selling before establishing non-residency will subject the capital gains to New Jersey income tax.

7. What happens if I am audited by New Jersey after moving out of state?

New Jersey can still audit you even after you move out of state. Be prepared to provide documentation to support your claim of non-residency. It’s essential to keep thorough records to substantiate your residency status during the transition period and beyond.

8. How long do I have to maintain records to prove my non-residency status?

Generally, you should keep tax records for at least three years from the date you filed your return or two years from the date you paid the tax, whichever is later. However, for more complex situations, it’s advisable to keep records for longer.

9. Can I avoid New Jersey taxes by simply changing my driver’s license?

No, simply changing your driver’s license is not enough to establish non-residency. New Jersey looks at the totality of your circumstances.

10. How can I ensure a smooth transition regarding taxes when moving out of New Jersey?

Start planning well in advance of your move. Gather documentation to support your claim of non-residency. Consult with a tax professional to develop a tax strategy that minimizes your tax liability.

11. What is the best way to prove I’m no longer a New Jersey resident?

The best way to prove non-residency is to provide documentation showing that you have established a permanent home outside of New Jersey, that you spend the majority of your time outside of New Jersey, that your business interests are located outside of New Jersey, and that you have changed your official documents to your new state of residence.

12. Are retirement distributions taxed by New Jersey if I move out of state?

If you are no longer a New Jersey resident when you receive retirement distributions, they are generally not subject to New Jersey income tax. However, if the distributions are attributable to contributions made while you were a New Jersey resident, there may be some exceptions.

Disclaimer: This information is for general guidance only and should not be considered as professional tax advice. Consult with a qualified tax advisor for personalized advice based on your specific circumstances.