#79 NJ State assumes eligibility for Propery Tax Deduction in a case when it shouldn't

[Joe T.]

There's a case of the following eligibility requirement (page 23 of 2019 Form NJ-1040) being unfulfilled: "Your income on Line 29 is more than the filing threshold amount for your filing status." OTS doesn't see it that way and goes on to calculate Worksheet H as if the property tax deduction is allowed.

Here's directly from the output file which captures both values, income and filing status threshold, that OTS used:
"L29 = 5383.00 NJ Gross Income
--- You do not need to file, (except to get refund). Income < $10,000. ---"

So in this case of income < filing threshold, one is not eligible to take a property tax deduction.

Now there's a further complication, if I'm reading this right. The sentence directly after the eligibility requirement sentence quoted above says:

"If you (and/or your spouse if filing jointly) were 65 or older or blind or
disabled on the last day of the tax year and you were not
required to file a return, see “Seniors or Blind/Disabled
Persons Not Required to File Form NJ-1040” below"

That and the section it refers to at the bottom right of page 23 seem to be saying to my untrained eye that there's an alternative for 65+/blind/disabled whose income is less than the filing status threshold. Rather than receiving the Property Tax Deduction, this subset of people can at least get a Property Tax Credit (which will appear on the Homestead Benefit received separately). That section also says to not complete line 39 (which might be the signal to NJ that we're asking for the credit).

Notice also that OTS calculates a negative tax. I'm no accountant, but is that allowed? From the output file:
"H1 = 8798.00
H2 = 8798.00
H3a = 3383.00 H3b = 3383.00
H4a = 8798.00 H4b = 0.00
H5a = -5415.00 H5b = 3383.00
H6a = -74.00 H6b = 47.00
H7 = 121.00
H8. Yes. (Take Property Tax Deduction.)
L38a = 8798.00
L39 = 8798.00

L41 = -74.00 TAX"

There is no entry for negative income in the tax tables, which arouses suspicion of using negative numbers when using the tax rate schedules.

However, I couldn't find any rules that made it impossible to have a negative value of line H5a. For example, take these hypothetical values that would make one eligible for the Property Tax Deduction and therefore be correctly completing Worksheet H:

H1 = H4a = $15000 (property taxes were $15,000 or more)
H3a = 10000 (income was the minimum to be eligible for the Property Tax Deduction

In that example, H5a = line 3a minus line 4a = -5000, and we have the same problem of how to calculate H6a using a negative number.

Note also that line 40, New Jersey Taxable Income is blank in the output file and the pdf form.

[Joe T.]

I suggest this be put on hold for a while, until I get back an answer from the New Jersey Division of Taxation (their automated reply said I would get an answer in "up ro 15 days"). I tried the NJ Tax Online entry system, and it also seemed to apply a Property Tax Deduction, so I sent them basically the same question as above.

I did not complete the NJ Tax Online, but got far enough to see that the tax calculated was 0, which makes me think there should be no NJ tax of a minus amount, like OTS calculated.

[Doug Marcus]

i live in nj and lots of the return is completed by filling out schedules in the instruction than actually on the form. its very frustrating. and yes, the property tax deduction cannot give you negative taxable income. your state taxable income is without any property tax deduction. the tax is then deducted by the nj property tax credit. we won't dare trying to fathom partial year residents.

[Joe T.]

IGNORE: I subsequently received a response from NJ.

Unfortunately, I did not get a complete response from the state. Although they seemed to agree with my understanding for my particular situation, they have not told me how they calculated a zero tax due on Taxable Income of 3,383.

Now when I attempt to ask that question in a followup, both through their website and by responding to their e-mail, I just get stock e-mails saying "For the most up to date information regarding tax returns and due dates, please visit the Division's website at https://www.state.nj.us/treasury/taxation/". In contrast, I had previously received an acknowledgement of my original question and a date by when they would answer. This new stock reply may indicate that they are temporarily not accepting questions due to the pandemic.

Without the knowledge of what's really going on in these calculations, I cannot suggest any certain changes, except the correction verified by Doug Marcus (thanks Doug!) that a minus tax is wrong. Also, line 40 seems like it should be populated with a value.

[Joe T.]

NJ responded, and gave this reason for a $0 tax:

"If your gross income is below the filing threshold for the appropriate filing status, you do not have a tax liability, and you should only be filing a return to obtain a refund of withholdings, credits, or previously made estimated payments or forwarded credits from your prior-year return. If you meet the eligibility requirements, your property tax credit will automatically be included with your Homestead Benefit."

Something like these changes seem warranted, I think:

If line 29 < filing threshold
----- line 41 = 0 // this is what the above response says

If line 41 < 0
----- line 41 = 0 // as a catchall, so there's never a negative tax

If eligible for property tax deduction as per right column on p. 23 of instructions [including being eligible in the case of 65/blind/disabled and line 29 < filing threshold]
----- Populate line 38a
----- If 65/blind/disabled and line 29 < filing threshold
----------- line 39 = blank
----------- line 55 = blank // per p. 23 instructions on bottom right.
----- else
----------- [do as now, which I assume is to populate either line 39 or 55, as per p. 23 instructions on bottom left]

Thank you for this great program. Last year I used it as a check, and it found an error I had made.

[Aston Roberts]

Just noting that these NJ State form issues were fixed in the recently released version 17.08.

Thank you,
-- Aston

[John Morgan]

I have read all the above and the instructions and I am quite confused. It seems to me that the code, as implemented in 18.07 is saying:
if (income LT threshold) OR (over 65) OR (blind) then not eligible for deduction.
Perhaps I am misreading the code but this just seems wrong. Perhaps it wants to be:
if (income LT threshold) AND (over 65 OR blind) then not eligible for deduction.
They can't want you ineligible just for being over 65, can they?
NJ could have found a way to make this simpler.

[John Morgan]

Upon further review (and some screwing around with the code), it seems that the only effect the threshold/senior/blind check has is to leave line 40 blank or fill it in. The value in line 41 stays the same either way. The calculation of line 41 is done earlier in schedules H and COJ. If we really want line 40 to be 0, we should not subtract property taxes in calculating line 41. If I seem confused it is because I am.