The Stealth Federal Income Tax On New Jersey

Federal tax deductions for state, property and other local taxes are becoming a thing of the past for many taxpayers in high cost of living states such as New Jersey. The alternative minimum tax, created in 1969 to ensure that a relatively small number of wealthy people didn’t use loopholes to avoid paying taxes, now penalizes people for paying obscene amounts of tax to state and local government. Some loophole.

That’s right, the more you pay in local taxes, the more you pay in federal income tax and it’s happening to people with incomes as low as $75,000. Why? Because the AMT (alternative minimum tax) in essence sets up two federal income tax systems, one for people that pay a greater percentage of their income to state and local taxes and another for those living in states with a more reasonable local tax burden.

Over 50 percent of American taxpayers currently paying the AMT live in one of four states: New Jersey, California, Massachusetts and New York – all states with high state income taxes and high property taxes. Why are the taxpayers in these states subject to the double whammy of high local taxes and higher federal taxes under the AMT? Because not all federal income deductions and exemptions are treated the same under AMT rules.

For example, deductions for interest on home mortgages do not subject taxpayers to the AMT, but deductions for state income and local property taxes gets the AMT meter running. ”Invest”, as the Democrats like to say, your hard earned money in state and local taxes and your reward is additional federal incomes taxes. Invest your money in a house in a reasonably taxed state and your reward is a tangible asset, your home.

Unfair, you bet. Take the example of two families, identical in all respects, except one frugal family lives in New Jersey and owns a home with no mortgage, the other lives in Florida, in a huge home with mortgage interest payments to match. The two families have the same income, earned in the identical manner; have the same number of children and all other tax exemptions, credits and deductions are the same, except one. The family in New Jersey’s state and local tax deduction equals the mortgage interest deduction claimed by the family in Florida.

The AMT forces the frugal family in New Jersey to pay thousands more in taxes to the IRS because their deductions are for state income and local property taxes The family in Florida lives in a home that our family in New Jersey can only dream about, and because they were able to fully deduct their mortgage interest payments, no AMT. To add insult to injury, the family in Florida enjoys a lower cost of living than the family in New Jersey. Fair? Hardly!

Did you pay an AMT this year? So many people are unaware that they pay an AMT because tax preparation software automatically calculates the additional tax and adds it to the bottom line. To find out if you’ve been hit by the AMT, check line 44 if you completed your tax return on form 1040 or line 28 if you completed form 1040A. If you find a number on the AMT line, that’s your added tax for living in New Jersey.

Don’t laugh if you didn’t pay an AMT this year, you probably won’t be able to avoid the stealth tax for long. Within the next 5 years the tax will snare 70% of taxpayers making $75,000 or more and in New Jersey the percent of AMT payers will be even greater.

Oh, and those loop holes the AMT was supposed to close for the wealthy, last year it missed 600 truly wealthy people that paid no taxes on their income. The mega wealthy like Teresa Heinz Kerry and Jon Corzine pay a lower effective tax rate than those hit by the AMT because they have the resources to place their money in trusts and other tax avoidance schemes. Anyway, the lawmakers don’t care; they know where the real money can be found, the middle and upper middle class.

The tax advantage New Jersey had over New York is long gone with the rising income and property taxes. How long before our state and local tax burden, coupled with the AMT drives businesses and hard working people out of New Jersey? What will happen to the value of our homes we’ve been taxed to death for owning in the Garden State? Do our representatives in Trenton and Washington care?

The Democrats believe we’re taxed too little and have opposed tax cuts at every opportunity and have voted for tax increases as if their life depended on it. This election year it’s time for the people of New Jersey to vote as if their life depends on it, because your financial health and security are hanging in the balance.

If you’re interested in reading more, here’s a great article from Business Week on the stealth tax.