Question about NJ State Income Taxes (mortgage, homes, college)

[Sassygirl18]

I should know this because I am a NJ resident and pay income tax every year, but .... I have 2 questions...

1. If we file our taxes "married, filing jointly", then is our NJ state income tax rate based on our joint income total, or is the rate set individually on each of our individual incomes?

2. Are we taxed on our entire income, or on our adjusted/post-deductions income?

Thank you!

[BobKovacs]

It's based on your combined income. If I remember correctly, you enter your adjusted income from your federal return on the NJ state return, but I could be wrong- a quick look at the form should answer your question for you.

[Calico696]

If you file "married filing jointly", taxation is based on your combined income. This would be salaries, plus interest, dividends, pensions etc.

You are then taxed on that total less deductions (which is your adjusted gross State income). What you can deduct on the State level is far more limited than what you can deduct on the Federal level.

Be sure to enter NJ wages directly from Box 16 of your W-2 form, as your Federal wages and State wages may differ due to payroll deductions which are "pre-tax". Examples of "pre-tax deductions which would differ between Federal and State exemption are: 403(b) contributions, medical, dental or vision plan deductions and cafeteria plan (FSA) deductions.

[ansky]

Someone told me that if both the husband and wife have similar incomes, then it is bad to file "married filing jointly" because the combined incomes put the couple into a higher tax bracket. They said "married filing jointly" is only advantageous if one person makes significantly less than the other. Is this true? My wife and I have very similar incomes. Would we be better off each filing single?

[colleeng47]

Originally Posted by ansky

Someone told me that if both the husband and wife have similar incomes, then it is bad to file "married filing jointly" because the combined incomes put the couple into a higher tax bracket. They said "married filing jointly" is only advantageous if one person makes significantly less than the other. Is this true? My wife and I have very similar incomes. Would we be better off each filing single?

That's not necessarily true, but the best way to determine that would be to do it both ways and see how it works out.

[MaverickDD]

Originally Posted by ansky

Someone told me that if both the husband and wife have similar incomes, then it is bad to file "married filing jointly" because the combined incomes put the couple into a higher tax bracket. They said "married filing jointly" is only advantageous if one person makes significantly less than the other. Is this true? My wife and I have very similar incomes. Would we be better off each filing single?

Always beware of what "someone tells you."

Originally Posted by colleeng47

That's not necessarily true, but the best way to determine that would be to do it both ways and see how it works out.

Right on!

Indeed, it seems as if New Jersey's tax rate schedules are purposefully confusing so it's difficult to determine which filing options result in a lower tax burden. The old rule is to file jointly unless explicit reasons exist not to. That's no longer the case. Generally, it's now beneficial to consider filing separately if your joint income exceeds $150,000.

However, New Jersey requires you to use the same filing status on your state return as used on your federal return. Accordingly, Colleen is absolutely right... do it both ways and see which comes out lower; but you'll need to do both the fed and state both ways to determine this.

Complicating matters is the fact that there are also non-tax effects of how one files. For example, the decision to file jointly or separately may impact college financial aid for your dependents, especially if husband and wife "live" in different homes.

Returning to the OP's specific questions:

1) The rate is determined by your joint income if you file jointly, your individual incomes if you file separately. However, the rate schedules are different.

New Jersey Tax Rate Schedules 2008

Table A for FILING STATUS: Single, Married filing separate return

If Taxable Income (Line 37) is:
Over......... But not over.............................................. ....................................... Your Tax
$ 0---------- $ 20,000 __________ x.01400 = __________ – ..............$ 0 = _________
$ 20,000--- $ 35,000 __________ x.01750 = __________ – .......$ 70.00 = _________
$ 35,000--- $ 40,000 __________ x.03500 = __________ – .....$ 682.50 = _________
$ 40,000--- $ 75,000 __________ x.05525 = __________ – ..$ 1,492.50 = _________
$ 75,000-- $500,000 __________ x.06370 = __________ – ..$ 2,126.25 = _________
$ 500,000 and over __________ x.08970 = __________ – $ 15,126.25 = _________


Table B for FILING STATUS: Married filing joint return, Head of household, Qualifying widow(er)

If Taxable Income (Line 37) is:
Over........ But not over.............................................. ..................................... Your Tax
$ 0 ---------$ 20,000 __________ x.01400 = __________ – .............$ 0 = _________
$ 20,000-- $ 50,000 __________ x.01750 = __________ – .......$ 70.00 = _________
$ 50,000-- $ 70,000 __________ x.02450 = __________ – .....$ 420.00 = _________
$ 70,000-- $ 80,000 __________ x.03500 = __________ – ..$ 1,154.50 = _________
$ 80,000--$150,000 __________ x.05525 = __________ – ..$ 2,775.00 = _________
$150,000-$500,000 __________ x.06370 = __________ – ..$ 4,042.50 = _________
$500,000 and over __________ x.08970 = __________ – $ 17,042.50 = _________

Noteworthy: For 2009, a new top rate kicks in for income over $1,000,000 of 10.75%!
This tax foundation link provides a lot of data about New Jersey taxes: The Tax Foundation - Tax Research Areas > New Jersey

2) To calculate your state income tax, unlike most states, New Jersey does not have you begin with your federal AGI or federal Taxable Income.

As you may know, your federal tax is a "net income tax" that permits you to itemize your deductions and reduce the income you're taxed on by the amount spent on medical expenses, property taxes, state and local income taxes, mortgage interest, gifts to charity, casualty losses, IRA and 401(k) contributions and a host of other things.

New Jersey imposes a "gross income tax." The only allowable deductions to income are medical expenses and property taxes paid on your principal residence. Even worse, losses in one area may not be used to offset income in another area. Losses are then deemed to be imaginary and set equal to zero.

Oversimplified Example:
This year, you earn $50,000 at your job. Self-employed spouse loses $40,000 because business is bad in this recession.
IRS: For federal purposes, your net income is $50,000 less $40,000 = $10,000. You pay federal income tax on $10,000.
NJ: For New Jersey purposes, your income is $50,000 less zero = $50,000. You're charged New Jersey income tax on the full $50,000!
..... But at least the spouse gets to offset next year's gain by this year's loss, right? Nope! You're screwed. (And they wonder why we're angry?)

[Sassygirl18]

Thank you to everyone who replied. This has been very helpful to me.