Tax Law

Published on: February 20, 2022

Should a Surviving Spouse file a Federal Form 706 Estate Tax Return to Claim the Deceased Spouse’s Unused Exemption from Federal Estate Tax?

Current estate tax law demonstrates why it is so important to consult with a New Jersey estate administration and planning attorney.

A deceased individual’s estate is entitled to an exemption from Federal Estate Tax agreement-3476369__340-300x217 currently in the amount of $12,060,000.00. However, since a surviving spouse pays no Federal Estate Tax on inheritances from the deceased spouse, the surviving spouse is permitted to claim the deceased spouse’s exemption for use upon the death of the surviving spouse. When creating an estate plan and upon the death of the first spouse, a New Jersey estate attorney must consider whether the surviving spouse would benefit from claiming the deceased spouse’s exemption. In order to claim that exemption, a Federal Form 706 Estate Tax must be prepared and filed.

The surviving spouse and her estate attorney must decide if it is beneficial to use the estate tax exemption of the first spouse to die at that time. The decedent spouse’s estate may be valued far in excess of the exemption amount, and the deceased spouse’s exemption should be used to create a credit shelter trust that will allow assets to appreciate and accumulate outside the surviving spouse’s estate.

Published on: June 15, 2018

Sports Gambling in New Jersey

by Pauline M.K. Young

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New Jersey has been trying to legalize sports betting for years. One of the primary hurdles for that legalization has been the federal Professional and Amateur Sports Protection Act (PASPA). That law, enacted by Congress in 1992, make it unlawful for a government entity to authorize, operate, etc., gambling on competitive games in which athletes participate. PASPA – also known as the Bradley Act – excluded Oregon, Delaware, Montana, and Nevada from its sports betting prohibitions. New Jersey (and any other state which had licensed casino gambling) had a 1-year window to pass laws permitting sports betting. However, New Jersey did not pass such a law within that window of time.

Later, in 2011, New Jersey voters approved an amendment to the state constitution to permit the legislature to create laws to permit sports gambling. (Sports gambling would still not be permitted for college sporting events taking place in the State of New Jersey or involving a New Jersey team.)

In 2012 the first Sports Wagering Act was introduced to permit betting on sports at racetracks and casinos. That Act was challenged by virtually all major sports associations (NFL, MLB, NHL, etc.) and ultimately struck down by the District Court as violating PASPA.

Published on: May 1, 2018

Forming a Tax Exempt, Non-Profit Organization in New Jersey

by Maurice W. McLaughlin

volunteer-1326758__340-300x236 Many people have the impulse to help their fellow man and to serve worthy causes. One of the most important tools to achieve this end is the non-profit, tax exempt corporation. Forming this type of entity allows funds to be raised without being taxed, permits contributors to deduct their contributions from their income tax, and protects the people working for the organization from personal liability. However, the process can be complex. Our attorneys help people and charitable organizations navigate this complex area. The basic steps are outlined below.

Incorporation. The first step is to incorporate. The primary protection offered by the corporate form is that it protects the people who run and work for the non-profit from personal liability. The organization is incorporated with State of New Jersey, and it must be designated as a non-profit. A Federal Employer Identification Number (EIN) must be obtained as well.

Trustees and Bylaws. To have a non-profit corporation, there must be a board with at least three trustees, each of whom must be at least 18 years old. The non-profit must also have bylaws, which are essentially the organization’s “constitution” — the bylaws set the entity’s purpose, the responsibilities and powers of the people who run the non-profit, and how it will be run.

Published on: March 2, 2017

Tax Exemptions for Non-Profit Businesses

by Pauline M.K. Young

volunteer-1326758__340-300x236 A nonprofit organization (“Nonprofit”) is an entity which puts its surplus revenue back into the entity, dedicating those funds to further the goals of the organization, as opposed to paying profits to owners or shareholders. Oftentimes Nonprofits are formed for a public welfare cause or interest or to advocate a certain ideological agenda. By way of example the American Red Cross, Make-a-Wish Foundation, and Greenpeace are all Nonprofits. While charitable organizations make up a large percentage of Nonprofits, there are many types of Nonprofits which serve selective groups or communities and which are not necessarily “charity” groups. For instance, credit unions and certain industrial or business associations can be Nonprofits as well.

The IRS provides for tax exemptions for many Nonprofits. For example, a Nonprofit may seek a federal income tax exemption if it is a corporation organized and operated exclusively for religious, charitable, scientific, public safety, literary or education purposes. Hospitals, schools, and credit counseling organizations are often tax-exempt Nonprofits as well. Some other examples of organizations which may obtain tax exemption include labor groups, business leagues, political groups, social clubs, mutual insurance companies, and agricultural organizations.

The application process to become tax-exempt as a Nonprofit can be complicated and onerous. First, the organization needs to be formed, meaning that the formal requirements for forming a business – such as incorporating that business with the State, creating By-Laws, Articles of Incorporation, and/or Operating Agreements, applying for a Federal Employer Identification Number (“EIN” or “FEIN”) with the IRS, etc. – must be completed. In New Jersey, generally the Nonprofit must also register with the New Jersey Charities Registration Section.

Published on: November 28, 2016

Changes to New Jersey Estate Tax

by Jennifer C. Meusel

The New Jersey Estate Tax is being phased out beginning with residents dying on or after January 1, 2017. Governor Christie signed a new law calculator-385506__340 [1], the new tax laws reduce the estate tax for resident decedent’s dying in 2017 by increasing the exemption amount to $2,000,000.00, and then eliminating the New Jersey Estate Tax altogether for resident decedents dying on or after January 1, 2018. New Jersey is no longer one of the worst states in which to die, and New Jersey resident seniors may no longer feel the need to establish domicile elsewhere. Those New Jersey decedents dying in 2016 with estates exceeding $675,000 will remain subject to New Jersey estate tax. Further, the federal estate tax will continue to apply to estates greater than the federal exemption amount, currently $5,450,000, which increases annually based on inflation. And, after the recent elections, we need to keep an eye out for new laws enacting changes to the tax code.

However, while the New Jersey Estate Tax is being phased out, the Inheritance Tax will remain. New Jersey is one of only six states which impose an inheritance tax on transfers from a decedent to a beneficiary. Whether an estate is subject to inheritance tax is determined by the relationship between the decedent and the beneficiary. Bequests to “Class A” beneficiaries (i.e. spouses/domestic partners, parents, children) are not subject to inheritance tax. The tax rate on transfers to non Class A beneficiaries depends on the “Class” of the beneficiary and the value of the asset transferred to that beneficiary. Likewise, non-resident decedents who own New Jersey real estate or tangible personal property will continue to be subjected to the New Jersey Inheritance Tax. Additionally, New Jersey Inheritance Tax Waivers will still be required in order to transfer title to real estate, brokerage accounts, securities and bank accounts.

Please call or e-mail the attorneys at McLaughlin & Nardi, LLC to create an estate plan or review and update an existing plan.

Published on: June 6, 2016

Corporate Business Taxes

by Pauline M.K. Young

office-1319849__180 The Corporation Business Tax (“CBT”) is a New Jersey State tax imposed on corporations for the privilege of doing business in the State. Nearly every state has instituted a similar type of tax on businesses, sometimes including taxes referred to as franchise taxes or privilege taxes. This tax is income-based and is measured by the net income which may be allocated to New Jersey. CBTs go towards general State use, with 4 percent of the CBT revenue dedicated to environmental projects and activities.

The following entities are exempt from CBT: corporations created under the limited-dividend housing corporation law, nonprofit cemetery corporations, nonprofit corporations without capital stock, federal corporations exempt from state taxes, certain agricultural cooperative associations, non-stock mutual housing corporations, canal and railroad corporations, water and sewer corporations, insurance companies subject to premiums tax, and certain municipal electric corporations.

A corporation may be either a “C” Corporation or a“S” Corporation. Generally, a corporation chooses its election of classification when it is being formed. A “C” corporation is subject to what is commonly referred to as “double taxation” because a C corporation’s revenue is taxed first as company revenue and then again when the shareholders are taxed for the revenue. However, there are also certain tax advantages including being able to deduct certain business expenses. On the other hand a “S” corporation is only taxed at the individual level, commonly referred to as a “pass-through” tax entity. The owners of the company are the only ones taxed for profit of the company. “S” corporation owners may be able to deduct corporate losses on personal tax returns. There are also a myriad of considerations in addition to tax factors which should be considered before making the determination as to what type of company to form.

Published on: April 11, 2016

Taxability of Lawsuit Settlements

by Pauline M.K. Young

capitol-22546__180 Lawsuits can settle immediately after a complaint is filed or several years into the litigation process on the eve of trial, or even during the course of a trial. Most cases will settle before a final resolution is determined by a judge or jury. Settlements generally offer a more favorable resolution than trial for several reasons: (1) both parties avoid the risk of loss at trial, (2) both parties avoid the considerable costs, time, and efforts involved in further litigation and trial, and (3) both parties avoid protracted appeals.

Both parties in a suit seeking monetary damages should consider tax implications in agreeing upon a settlement. This is true for defendants (the party who is being sued) and plaintiffs (the party who filed the lawsuit) since the defendant may need to make tax deductions prior to disbursement to the plaintiff and/or a plaintiff may need to include some types of settlement proceeds as taxable income. Further, a defendant may need to issue a 1099 to the plaintiff along with the disbursement of settlement funds. These determinations are highly fact-sensitive and every party should consult their own CPA or other tax professional who would be most familiar with each parties’ particular situation.

Generally, settlement money received for a personal physical injury is not taxable. (There are exceptions, but this is the general rule.) However, it is important to take into consideration that the settlement amounts may be subject to reimbursement to Medicaid/Medicare or medical insurance. Indeed, the Social Security Act requires that Medicare payments be reimbursed by a subsequent lawsuit recovery, such as a settlement or award.

Published on: July 23, 2015

Property Taxes & Appeals

by Pauline M.K. Young

It is no secret that New Jersey citizens pay the highest property taxes in the nation. Property taxes are assessed by local governments and used to pay for local programs and services. Therefore, things that may affect a homeowner’s property taxes include: the local (municipal and county) programs and services, including public schools, local revenues available through other sources, the market value of the homeowner’s property, and the total value of all properties in the municipality. All taxable property is assessed a value by the town tax assessor. “The assessor shall…after examination and inquiry, determine the full and fair value of each parcel situated in the taxing district at such price as, in his judgment, it would sell for at a fair and bona fide sale by private contract on October 1 next preceding the date on which the assessor shall complete his assessments…” N.J.S.A §54:4-23.

Therefore market value should correlate closely with the assessed value. However, it is too labor intensive to have tax assessors reassess every individual property each year. Indeed, New Jersey has 565 municipalities. Nearly every one has its own local tax assessor.

Therefore, generally the tax for each property is simply adjusted slightly each year to meet budget requirements. In that case, the municipality may only do town-wide reassessments once every several years depending on changes to and needs of the municipality, policies, and property sales. This is done to insure “equalization” – insuring that each property is carrying its fair share of the tax burden. For instance, if assessors see that properties are being sold for values that significantly differ from assessed values, then that might be an indicator that a reassessment needs to be done to ensure equalization. This is sometimes referred to as an assessment-sales ratio comparison.

Many people, particularly in New Jersey, believe that their property taxes may be incorrect. In order to determine this, the homeowner first needs to have a basis for what the accurate market price would be. If the home was recently sold – that may be a good indicator. Also, the recent sales prices of other similar properties in the municipality may also be good indicators. (In any case, if a homeowner is looking to challenge her tax assessment, an expert appraisal will most likely be required.)
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Published on: August 29, 2014

Payroll Withholding Tax Basics for Both Employers and Employees

by Pauline M.K. Young

Requirements regarding withholding payroll taxes are something that every business owner should be familiar with, particularly businesses which handle their own payroll internally (as opposed to outsourcing to a payroll company). Employers are almost always required to withhold taxes from employees’ salaries, wages, and other compensation, such as commissions or bonuses.

While many people think of paying income taxes as what they do when they file tax returns by mid-April of each year, income taxes are actually considered a “pay as you go” tax. The tax returns at the end of the year then adjust the withholdings calculation depending on various other considerations such as deductions, marital status, and other income.

The employer withholds a certain amount of taxes from each paycheck which the employer is then required to turnover to the government.

There are both federal withholdings and New Jersey state withholdings.
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Published on: August 6, 2014

New Jersey’s Use Tax

by Pauline M.K. Young

New Jersey’s Sales and Use Tax Act is most often cited to refer to sales taxes while the use tax http://www.state.nj.us/treasury/taxation/pdf/pubs/sales/anj7.pdf tends to be less well known. When goods or services are purchased outside of the state for use in New Jersey, and the sales tax was not collected by the out of state retailer, or collected at a rate less than the New Jersey sales tax rate, then the use tax comes into play.

New Jersey recognizes the concept of reciprocity when considering the sales taxes of other states. This means that when goods or services are purchased and received in another state to be brought into and used in New Jersey, and sales tax is paid to that non-New Jersey state, New Jersey credits the purchaser for the taxes paid. However, New Jersey does not allow this credit unless there is a reciprocity agreement between the two states where both states recognize and honors the same reciprocity for each other.

If the tax rate in the state is equal to or greater than New Jersey’s, no use tax is due. (New Jersey’s current sales tax rate is 7 percent.) For example, if the non-New Jersey purchase was for $100 and the sale tax rate paid by the purchaser in that state was 5 percent, the purchase paid taxes in the amount of $5.00. Thus, the New Jersey use tax would be $2.00. If the non-New Jersey purchase taxed at a rate of 8 percent, no additional use tax would be due and owing to New Jersey.

If the out of state purchase is delivered directly to the purchaser in New Jersey, there is no credit for any sales tax paid to the other state. New Jersey’s use tax is therefore due for the full 7 percent of the purchase price, including any delivery charges.
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