What New Jersey's Tax Hike on Millionaires Means for Clients

If any of those clients live six months and a day outside the state, they can avoid paying state income tax. 

Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, based in Short Hills, New Jersey, doesn’t expect a mass exodus of millionaires. “I don’t think an additional 2% is the thing that will make” New Jersey millionaires leave the state. “They will be upset and moan and groan but it won’t have a material impact.”

Academic studies on tax-led migrations of millionaires have reached differing conclusions. A 2019 Stanford University/Hoover Institution/NBER study about California’s 2012 tax hike on millionaire residents found that over 2% of those earning more than $2 million a year left after the tax hike was imposed compared to 1.2% before the hike took effect. But that 2% “millionaire tax flight” level is of only “marginal statistical and socioeconomic significance,” according to a 2016 report by researchers from Stanford University and the U.S. Treasury based on the tax returns of million-dollar earners nationwide. 

“There will be a certain number of people that leave New Jersey and establish residency elsewhere because of this,” says Matt Masterson, a partner and wealth advisor at RegentAtlantic, which is based in New Jersey. “But what drives those decisions most is where your family lives — the kids and grandkids. Money is not the only factor.”

One important factor for where one lives has been job location, but that factor has declined in importance. Many people have been working from home because of the pandemic, and many will likely continue to do so even as companies reopen offices, so they can theoretically move outside the tri-state metro area, which includes New York state and Connecticut.

“It will be really interesting to watch over the next few years where high earners migrate to,” said Gorman, who’s based in San Francisco. “New Jersey is projecting $390 million now. It will be fascinating to see what they project three, four, five and 10 years from now.”

Tax Planning Tips

Gorman suggests that advisors working with high earners in New Jersey discuss where those clients want to live in the future. For corporate executives subject to the new tax, she suggests talking about deferring income to avoid triggering the tax and electing a 10-year payout so when they exit the state New Jersey can’t source it.

Some states like New Jersey and Pennsylvania have tax reciprocity agreements, so it’s important that taxpayers have “in-depth discussions with their tax and estate planners,” Gorman said.

Masterson recommends that New Jersey business owners, including those who live outside the state, consider using trusts to move those assets out of state in order to avoid state taxes when the business is sold. “But you have to do that well in advance of the sale,” he says.

New Jersey millionaire taxpayers may also want to convert traditional IRAs to Roth IRAs if they expect their tax bracket today is lower than it will be in the future.