With the tax-filing deadline upon us, taxpayers are putting the finishing touches on their returns. While most filers make every attempt to complete their returns by April 15, millions of taxpayers are forced to file extensions each year. Why the delays?
Although there are many reasons for taxpayers to request a six-month extension, the complexity of our tax code is often the major culprit. Additionally, federal taxes and state tax requirements differ and add another layer of complexity for taxpayers to deal with.
So what are the most common differences that taxpayers should be unaware of? For starters: retirement plan contributions.
Many taxpayers assume that their contributions toward retirement plans will be deductible on their federal and state income tax returns. Unfortunately this is not the case with all plans.
According to the New Jersey Division of Taxation, unlike the federal government, New Jersey does not allow you to exclude from wages amounts you contribute to deferred compensation and retirement plans, other than 401(k) plans. This means IRA plans and Keogh plans are not deductible on your New Jersey return, leading to higher taxable wages than your Federal return.
Mortgage interest can be a helpful deduction on your federal taxes. The Brookings Institution reports that the tax deductibility of mortgage interest is expected to save taxpayers about $101 billion on their federal taxes in 2013. Regrettably, the state of New Jersey does not offer a mortgage interest deduction. However up to $10,000 of property tax deductions are available, which provides some relief to taxpayers.
Charitable contributions are yet another category where discrepancies can be found. Unlike your federal tax return, which allows for charitable deductions against income, the state of New Jersey does not allow you to write off these contributions, leading again to higher taxable wages.
Medical expenses can have an adverse effect on taxpayers and are deductible on federal and state returns. However, many filers inaccurately assume that the thresholds for deductibility are the same.
One of the most commonly missed deductions on a New Jersey tax return is for medical expenses, said Craig Johnson, a certified public accountant. “People often miss the fact that the medical deduction for the state of New Jersey tax return is the amount in excess of 2 percent of income versus the 7.5 percent threshold for their federal return. Many times they won’t even bother to accumulate their medical costs because they are unaware of this fact.”
The lower 2 percent threshold can prove beneficial for New Jersey filers faced with the challenges of higher medical expenses.
According to the Bureau of Labor Statistics, the unemployment rate in New Jersey is 9.3 percent. While unemployment benefits are included as taxable income for your federal return, they are not taxable on your New Jersey return. With so many New Jersey residents collecting benefits, this helps to reduce the tax liability to those who are unemployed and need to maximize their benefits.
Unfortunately many taxpayers have had to restructure their finances as a result of the economy. While debt that has been discharged or forgiven is not taxable by New Jersey, it may be required to be included as taxable income on your federal return.
According to the IRS, “In general, if you are liable for a debt that is canceled, forgiven, or discharged, you will receive a Form 1099-C, Cancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, then the debt has not been cancelled and you do not have taxable cancellation of debt income.”
Exceptions to this rule include, but are not limited to, debt canceled in a Title 11 bankruptcy case, debt canceled during insolvency, cancellation of qualified farm indebtedness, cancellation of qualified real property business indebtedness and cancellation of qualified principal residence indebtedness.
The exclusion for “qualified principal residence indebtedness” provides tax relief on canceled debt for many homeowners involved in the mortgage foreclosure crisis. Review IRS “Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments” for additional information.
It can be challenging enough to get a handle on your federal return, let alone the New Jersey state requirements. The discrepancies noted can create confusion, leading to errors on your returns.
Because everyone’s situation is unique, consult your tax, legal and financial adviser to ensure that you are properly accounting for these differences and implementing the most appropriate approach for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner. He can be reached for questions at 732-280-7550 or kurt.rossi@Independentwm.com.
