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Taxing event: How accounting firms are preparing clients for sudden change in laws around N.J.-Pennsylvania border

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Christopher Lieto, tax specialist at WeiserMazars LLP.
Christopher Lieto, tax specialist at WeiserMazars LLP. - ()

A love for sudden changes? Not a trait totally necessary for the tax accounting profession, let's face it.

But the stroke of a pen — clearly mightier than the non-deductible sword — recently brought a very abrupt end to a nearly 40-year-old tax agreement between New Jersey and Pennsylvania, and another one did in a 15-year-old estate tax.

These developments and others are having a profound effect on the work of the state’s tax specialists, such as Christopher Lieto of WeiserMazars LLP.

“What we love to be is ahead of things,” Lieto said. “The conversations we have with clients are proactive — what they’re anticipating for the remainder of the year, if they’re retiring, if someone is getting married, if they’re buying a home soon.

“But when major changes come down, it’s a time when we’re in the position of having to be reactive.”

It’s a Herculean effort to make adjustments in the already complex area of tax planning, particularly when some of the state’s tax experts say even more significant changes could soon be discussed in New Jersey.

Regardless, Lieto and other tax specialists believe they have an ability to prepare clients for changes that go beyond other options.

“That’s because we offer clients more than just putting numbers in a box, we give them peace of mind,” he said. “Taxes are very personal, because you’re dealing with someone’s hard-earned money that they don’t always want to part with.

“You’re not going to get the same thing out of getting TurboTax from your local store and doing it that way.”

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With something like Gov. Chris Christie’s decision last month to end the income tax reciprocity between New Jersey and Pennsylvania — a long-held agreement that people would pay income taxes where they live — WeiserMazars joined other firms in immediately sending out high-level explanations to clients.

“We move quickly and make sure we have all the facts right — the last thing we want to do is put something out there and have it be wrong,” Lieto said. “We want to remain the first people clients call.”

The policy had held up since the '70s, when the tax rates in New Jersey and Pennsylvania weren’t too far apart, with the Garden State’s being 3.5 percent for top earners and the Keystone State’s being a flat 2 percent. Since then, however, Pennsylvania’s rate rose by about 1 percent while New Jersey’s rate increased to around 9 percent.

With the end of the agreement, there will be a credit for taxes paid in the other jurisdiction. With that credit, Jerseyans will end up paying the same on their taxes, while those crossing the Delaware River will pay more.

Lieto’s advice to those on the business side?

He said New Jersey employers need to know that, if you employ Pennsylvania residents in your business, you’re obligated to withhold that state’s income tax on wages until January. After that, the new obligation is to withhold New Jersey tax on those employees, no different than any other employee.

At the end of the day, everyone’s tax returns will get a little thicker.

“From a practitioner standpoint, it’s more work for us — not that I’m complaining — because now you’re dealing with another return,” he said. “It’s another level you have to expose the taxpayer to and you have to educate them on why they have an extra return, how the credit works and why some may be paying more.”

A taxing campaign season
With the presidential election coming to its climax, people in the tax world are just as eager to see who the next occupant of the White House will be.
“Both (George) Bush and (Barack) Obama by the spring of each of their first years in office, relatively early on in their terms, managed to get significant tax legislation enacted — Obama with an economic stimulus bill and Bush with various tax cuts,” said Neil Becourtney, a partner at CohnReznick. “Whoever wins the election is probably expected to make similar changes.”
Jordan Amin, a partner at EisnerAmper LLP, has some doubt:
“We can think about it, and it’s very important for our clients to pay attention to the policies that both politicians are putting out there in regards to taxation — particularly because these two candidates have very different views on it,” he said. “But we also have to be aware that just because a candidate says they want to accomplish something, it doesn’t mean they’re necessary going to be able to, with the checks and balances built into the system and the fact that it might not be feasible.”

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Another change affecting New Jersey taxpayers is a gradual phase-out of the estate tax, which was packaged into a deal to replenish the Transportation Trust Fund for $2 billion in annual infrastructure improvements.

The current amount that can pass tax-free in the state is inheritances valued at $675,000. It has been that way since 2001, said Roxanna Hammett of the trust and estates section of West Orange-based law firm Chiesa Shahinian & Giantomasi PC.

“Other states that have an estate tax have increased their exemptions over the years, but New Jersey never did,” she said. “It has the lowest exemption in the whole country.”

The figure will be upped to $2 million beginning Jan. 1, before its elimination in 2018.

Hammett said she has been alerting clients to review their wills in the case that they contain clauses referring to New Jersey’s exemption.

The change was bundled with other New Jersey tax modifications, such as raising the retirement income deduction fivefold, to $100,000 for married couples over four years.

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The revenue consequences such changes may have on the state’s coffers could serve as impetus for a tax legislation push that could have a large impact on certain businesses, according to Bill Korman of Ernst & Young.

Korman, an executive director of state and local tax at the global firm, said a focus could be put on combined reporting, which treats a company’s subsidiaries and other entities, such as trusts and partnerships, as a single entity for tax purposes.

“One of the reasons combined reporting is going to be more and more compelling during next year’s gubernatorial elections is that downward pull in revenue collections over the next few years as part of that (Transportation Trust Fund deal).”

New Jersey is included in the minority of states in the country that does not operate under combined reporting, and its introduction could be seen as a way to increase revenues.

“Way back when — in the '70s or sooner — few states required combined reporting, but today it’s the other way around,” Korman said. “New Jersey has been a holdout, but combined reporting has been a conversation here (for decades).

“Those conversations are starting to take more serious form, and in the upcoming election cycle, it could be a major issue.”

Considered a nonstarter under Trenton’s current administration, combined reporting has been criticized by business interests that Korman said benefit financially from having entities taxed separately and outside the high-tax Garden State.

“Small businesses (are) in this instance not against combined reporting, because it doesn’t so much affect them; if a business is 100 percent in New Jersey, it doesn’t matter if you file one return or 10 returns,” he said. “Every time you have a tax law, some companies don’t mind it, some do.”

Andrew Ebneter, a tax and business partner with Marcum LLP, said not to expect much movement on the issue in the interim.

“But I wouldn’t be surprised to see something here soon like the state of North Carolina did,” he said. “Last year, North Carolina distributed a form that certain corporations were required to fill out if they had receipts over $10 million in the state, to fill out a schedule that showed what their income would be like if they were a (market sourcing state).

“It wouldn’t shock me if New Jersey’s leaders were to start studying combined reporting (similarly, through the use of forms and surveys). But we’ll have to wait and see.”

E-mail to: brettj@njbiz.com
On Twitter: @reporterbrett

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