0:00:00.0 ANNOUNCER: The financial views and opinions expressed by the host and guest on this program do not necessarily reflect the viewpoints of 107.7 The Bronc, Rider University or Certified Wealth Management & Investment. The material discussed is not designed to provide the listeners with individual financial, legal, or tax advice.
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0:00:27.6 ANNOUNCER: It’s time to grow your bank, as 107.7 The Bronc presents Master Your Finances with Kurt Baker, a certified financial planner professional with Certified Wealth Management & Investment. Kurt and his team of financial guests will help you turn those singles into seas of green and plan your financial future accordingly. Now, here is your money managing host for the hour, Kurt Baker.
0:00:48.8 Kurt Baker: Did you know that unexpected facts of New Jersey tax Law can catch taxpayers off guard? Do you wanna learn about tax laws that can be used in a variety of situations? Jamie M Zug, a tax attorney at McCarter & English assist taxpayers in avoiding and resolving disputes with the New Jersey Division of Taxation and the Internal Revenue service, assisting taxpayers in navigating compliance issues and represents taxpayers in administrative and judicial tax controversies. With his experience providing legal advice on tax aspects of transactions and uncertain tax positions, he will assist you in better recognizing unusual New Jersey tax situations that may apply to your business or family. As you listen today’s show, you will feel more empowered to identify potential pitfalls and to know when to seek help. This is… We live in a fun state. Of course, New Jersey is known for having interesting tax situations. And from my experience of living here, occasionally things change.
0:01:55.2 Jamie M Zug: Definitely.
0:01:56.3 Kurt Baker: So it’s kind of important to keep up. Why don’t you give us a little bit of your background. It’s kind of an interesting background, how you got to this, your expertise. I know you have kind of a blended, experience level. Do you mind giving us a little bit of backstory on how you got here?
0:02:07.1 Jamie M Zug: Sure. I’ve been representing taxpayers from McCarter & English for just a little over a year. But before that, I was a Deputy Attorney General, and I represented various agencies in the New Jersey Department of Treasury, but especially the division of Taxation. So I did a lot of… I did a lot of tax litigation and the division of taxation was my client. So I got to know New Jersey tax from the inside. And it’s a very small and very personal practice area. So, my entry as an attorney for the Division of Taxation, I think, has been very helpful to have those relationships because New Jersey Tax is a very small world.
0:02:53.9 Kurt Baker: Right. So it’s an important one too. It affects many businesses of course and individuals here in New New Jersey. So it’s important that you understand them, and as we pointed out in the intro, it’s better off to avoid these things and do things right the first time that you get involved.
0:03:05.2 Jamie M Zug: Definitely.
0:03:07.1 Kurt Baker: So maybe just give us, you know, some, some steps like how we better manage this and what we should be doing. What are your thoughts?
0:03:13.2 Kurt Baker: Sure. Well, first of all, what are we even talking about when we’re talking about state tax. I think oftentimes when people think about tax, they tend to jump to federal tax and the IRS. The New Jersey Division of Taxation oversees over 35 state and local taxes, surcharges, and fees. And a lot of those are really obscure, things that you’d never encounter. But the main ones that a lot of people will encounter are gross income tax. So that’s your personal New Jersey income tax, corporation business tax, which would only apply to… Generally only applies to incorporated entities sales and use tax, realty transfer fee, controlling interest transfer tax, and inheritance tax. So those are… Those ones tend to be a focus for, for A lot of people.
0:04:02.8 Kurt Baker: Right. And they can add up for sure. Right. Especially if you don’t do it correctly.
0:04:06.3 Jamie M Zug: Definitely. Right, right, right, right. So there are things about New Jersey tax that tend to come as a surprise to folks. And the first one that I’d like to address is the worst. It’s like ripping the Band-Aid off. And you hope that nobody’s ever in this situation. But New Jersey collections, so this is once you’ve already received usually… Well, you should have already received notice and opportunity for a hearing from the taxing authority. They say that you owe additional tax for some reason. And now you’re in a situation where there are collection proceedings against You.
0:04:47.5 Kurt Baker: That doesn’t sound Good.
0:04:48.7 Jamie M Zug: It’s not good. It’s not anyone’s favorite day. When this happens with the IRS, it’s sort of the beginning of a process. There are a whole bunch of different procedural avenues that you could take, where you can present to the IRS different collection alternatives. And this is because of abuses that were happening decades ago where the IRS was, you know, forcing people out of their houses and/or you know, you hear stories about them taking somebody’s wheelchair, even just really, really horrible things. So Congress stepped in and they created processes, administrative processes that apply at the collections part of the proceeding. So those are legislative protections in federal legislation. So there’s nothing like that in New Jersey. It does not exist. The legislature has not created such processes. As a consequence, once you’re at the collection stage, you sort of already had your notice, your opportunity to be heard, and there’s really not too much that you can do at that point. It ends up being very different than the federal process where you have things that you can do.
0:06:06.8 Kurt Baker: So let me, if you don’t mind, let me step you back a couple steps here. ‘Cause I know, I know the IRS part, as you point, is long and… I remember I had a family member once that got like involved in the innocent spouse issue where there was an… Like got remarried to a spouse and things like that. And it was like, in the old days, it was kinda like, well, it doesn’t matter, you signed the return, you have to do it. And I know there’s some protections now, and if you wanna address that, it’s great. But I know New Jersey, I guess it’s… As I try to tell people, when you get notices from these governmental agencies, please open them and read them and respond, because if you ignore them, you never know.
0:06:37.3 Kurt Baker: You might have 10 days, you might have 30 days. I mean, you may have a very short timeline when you get some of these things. So it’s better off opening it. And sometimes you may be pleasantly surprised, there’s no big deal, they just want some information. Other times it’s like, you better act now because they’ve got some huge number that you need to address and maybe just some misunderstanding. And if you clarify it and fix it, you’re gonna be fine. But if you ignore it, before you know it, you know, the penalties and interest and all these other costs can far exceed this little mistake that maybe was on your return or somewhere that you oversight or whatever the case may be. Right.
0:07:05.2 Jamie M Zug: Right, right, right.
0:07:05.9 Kurt Baker: So how does New Jersey. Now, can you kind of walk us through the process? If something were to happen to me in New Jersey or anybody, what’s their kind of, their notice process? I mean, they’re gonna send me something and then, you know, kind of what’s my timeline, right? I mean, usually, or does it differ based on what the item might be?
0:07:21.2 Jamie M Zug: I think it does look different depending on what, what the taxes. So I think that it can look different, but you’re exactly right that you will receive some sort of notice with clear instructions about what responses are available to you and deadlines for when you need to make those responses. For instance, if New Jersey imposes an an assessment of additional tax, then the taxpayer will have 90 days in which to appeal, and they can make that appeal either to the division of taxation or they can go straight to tax court. And if you miss that 90-day window, there’s nothing that you can do. It’s not like the 91st day, you know, they’re gonna give you some wiggle room.
0:08:10.7 Jamie M Zug: For the tax court, they don’t even have jurisdiction to hear it after day 90. So it’s a really, really hard deadline. So you’re exactly right. Paying attention and, and opening that mail and seeing, you know, catching the notice, that’s really where you do have the most opportunity to actually do something about a situation. Now, on the flip side, if you’re in collections proceedings and you did not receive notice for some reason, then you can do an awful lot. You know, it’s not like… So the whole reason that collections can be so brutal is because the division of taxation has presumably already satisfied its due process requirements by giving a taxpayer notice and opportunity for a hearing, so if they did do that…
0:09:00.4 Kurt Baker: So let me give you a scenario. Let’s say I’m a snowbird and I’m here in New Jersey and something gets sent to me, and all of a sudden it doesn’t follow me and I don’t see it, maybe gets forwarded to me and maybe the person watching my house opens my mail, doesn’t realize this is important, or something like that.
0:09:17.9 Jamie M Zug: Yeah, so division’s position is gonna be that they’ve satisfied their obligations as long as they send it to your last known address. And obviously in real life, there are things that… There are things that can happen. For instance, let’s say that your spouse is doing something maybe they shouldn’t with taxes and they don’t want you to know about it. Well, if there’s a notice that comes to you and your spouse at your address and your spouse doesn’t want you to see it, you might not see that notice. The Division’s position is gonna be, we satisfied our obligation. We can’t, we can’t like track you down and hand you the notice. We sent it to the last known address. So making sure your last known address addresses up to date with the taxing authorities, that’s certainly important.
0:10:00.4 Jamie M Zug: Another thing is too, you can challenge that. You can say, well, I didn’t receive it. Where’s the tracking information? They should be sending these things by certified mail. But maybe they didn’t, and if they didn’t send it in by certified mail for some reason, so you say, I didn’t receive it. Show me that you received it. And they can’t… They have nothing to demonstrate that they sent it to you. That’s another place where if you’re in a collection situation, there might be… You might have some room to move.
0:10:27.6 Kurt Baker: Yeah, I think this might be a good time to discuss whether or not any of these taxing agencies are gonna call you on the phone and ask you for information as far as collections goes. I know some… This is an issue out there. Sometimes, it’s Hey, you owe the IRS money, run down to Walmart and get me 10, $50 gift cards, and that’ll take care of your assessment.
0:10:43.5 Jamie M Zug: Yeah. I mean, be careful, right? About, I mean, who knows who’s calling you on the phone? I mean, sometimes taxing authorities will sometimes send, personnel to visit people in person. So that’s, that’s something that happens. And also the Division of Taxation does contract with third parties to do collections. Pioneer, is the one that people, that people tend to, tend to hear from. But if there’s a third party trying to contact you about debt, you can always ask to be referred back to the… Back to the creditor. And this is in any situation, not just in tax. So if you have some sort of third party collection agency trying to track you down, you can have them put you in touch with, with the creditor, and that goes for New Jersey too. And oftentimes that’s what you wanna do. I mean, talking to somebody at the division, it can be… It might be that, I don’t know that that, that you can work with them more easily perhaps than than somebody like Pioneer, potentially.
0:11:45.2 Kurt Baker: Well, that’s just awesome and that’s a great base. You’re listening to Master Your Finances. We’re gonna take a quick break. We’ll be right back.
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0:11:52.5 ANNOUNCER: Yeah, you’ve got loads of money, but it’s all about how you manage it. Let’s get back to learning how to grow your green with with Kurt Baker of Certified Wealth Management & Investment only on Master Your Finances.
0:12:08.3 Kurt Baker: Welcome back. You’ll listen to Master Your Finances. I’m here with Jamie Zug, and we’re talking about taxes, not necessarily people’s most favorite thing, but it’s actually an extremely important thing. I just remember once that, Bill Gates said, one of the things he attributes the success to is understanding the tax code and how to manage it to his benefits, so to speak. So I just thought that was interesting. So, you know, it’s not necessarily something that you want to be involved with, but it’s something very important part of your life, whether you like it or not. And it’s better to do it correctly than to have it come and bite you when you don’t, when you least expect or when it’s extremely inconvenient, which is typically always. So Jamie, I appreciate you walking us through. So I think one of the things I picked up from the first segment is like, that IRS seems to give us a little bit more of a timeline. Some basically, because some of the, the abuses they had, the legislature stepped in and said, look, we need to get people a little bit more time and a little more protections for people in the tax situation. Whereas, New Jersey really doesn’t have anything quite like that. If you get a notice, you don’t respond, it sounds to me like when it’s as quickly as 90 days, boom, it’s done. It’s in stone, now you just have to deal with whatever that collection number is and how you manage it at that point.
0:13:12.1 Jamie M Zug: Right. That’s exactly how it is when it comes to collections. But yeah, just like you said, collections is, collections is after, you know, they’ve initially reached out to you. So there is a lot that you can do initially. And even in collections, so there isn’t a lot that you can do. There aren’t a lot of procedural mechanisms, but there are a few things that you can do. Sometimes, for instance, the division will come and say, all right, we can give you a payment plan, but it’s gonna be limited to 12 months. Well, you can push back on that. They can give you a payment plan of 60 months. Sometimes if you have some sort of financial hardship, they might even do 72 months. So if they’re just saying 12 months or nothing, that’s something to push back on and see if you can get 60 months or 72 months.
0:13:57.5 Jamie M Zug: So that’s something that can be, that can be done. Another thing that can be done for people that have, ’cause oftentimes people will have tax debt, not just with the division, but also with the IRS. And sometimes with the IRS, they’ll be in a process where it depends on what collection alternatives they’re pursuing. But sometimes it matters… What goes into the calculations with the IRS is how much money do you have? So if you pay down your New Jersey debt, that can reduce the amount of money that you have for the IRS that goes into that, that goes into to what the IRS can collect against. So sometimes it’s… You don’t want to, right. So you can’t… There are a lot of.
0:14:44.3 Kurt Baker: So the sequence of paying debt matters.
0:14:46.8 Jamie M Zug: Exactly. Right. So you don’t want to… You know, there are a lot of ways that you, you could try to get rid of money to keep her from the IRS. That would be criminal.
0:14:55.3 Kurt Baker: Yeah, that could be a big problem.
0:14:57.1 Jamie M Zug: But a but a legitimate way that you can do it is you can pay down your state debt first. And then depending again on what kind of collection alternative you’re pursuing with the IRS, that could be an advantage.
0:15:08.2 Kurt Baker: Now, are there differences in like… I know typically there’s like an interest penalty kind of situation too that like accumulates. Now, is New Jersey significantly indifferent than the federal government? Like does it matter? I mean, they’re gonna go with some statutory interest rate or some… I mean, is that usually how it works? And are they similar as far as how that part’s structured?
0:15:24.6 Jamie M Zug: Yes, they’re gonna be statutory, penalties, statutory interests. There’ll also be… In New Jersey, there are also can be, collection fees and there can be different kinds of collection fees. Whenever you’re talking to New Jersey about collections, ask for a schedule of liabilities because the thing that they are contacting you about might only be, one case or one period. It might be that there are more periods where you owe debt that aren’t on that collections notice that you received. So getting the full picture when you’re in a collection situation is critical so that you can, make informed decision. Ask them for the schedule of liabilities. The schedule of liabilities will spell out, which parts are interests, which parts are penalty, which parts are… You’ll see an RF.
0:16:19.1 Jamie M Zug: The RF is amounts that they’ve paid. It’s the recovery fee, it’s amounts that they’ve paid to Pioneer. And then you’ll see costs, which are the costs of entering judgments for the various periods. So that might change your approach. Let’s say you wanna enter… Try and enter into a closing agreement with the division, like I said, there isn’t a lot that you can do, but sometimes there is something you can do. The arguments that will be more persuasive are arguments that are for New Jersey, we’re just talking about New Jersey here. Are arguments based on affordability. So if it’s… You know, you can’t get blood from… Draw blood from a stone. And if they can’t collect against you, what’s the point? So if you spell out… They have these extremely detailed forms and you fill it out thoroughly and precisely, you can pursue a collection alternative with them. And so you fill out the form and you say, Hey, how about I just pay the tax and half of the interest? And you try knocking off the RF lines. You try knocking off the cost, try knocking off the penalties. You know, they may or may not go for it, but it’s something that can be tried in the context of seeking a closing agreement.
0:17:29.8 Kurt Baker: So I have a question for you. There’s a lot of small business owners out there, and many of them were interrupted, let’s say, in the last couple years due to, I don’t know, some virus that went around that I heard about. Let’s say I started a business, ran into trouble. I might be one of… Might be a sole proprietorship, might be a couple of partners involved in there, and also may run into a tax liability situation. And we say, we’re just gonna close the business, be done with this. So what happens to me as the individual who was maybe an officer or a major shareholder of that entity, because the entity’s now gone, the restaurant’s done, whatever the case was, it no longer exists. It’s not going to… No revenue’s gonna come from it, it’s a dead entity, but I’m still there. So how am I affected by this situation, if you mind kind of clarifying how that all works?
0:18:14.0 Jamie M Zug: Yeah. So it’s, it’s gonna depend both on what kind of entity and what kind of tax. So if it’s a sole proprietorship, it doesn’t matter because the entity’s liability is your liability.
0:18:23.0 Kurt Baker: It’s right to you. Correct. Yeah.
0:18:25.4 Jamie M Zug: Right. If it’s a corporation or an LLC, you’re gonna have limited liability, but not for everything. For specifically for sales and use tax, you’re a withholding agent for the buyers. And as a withholding agent, there can be personal liability for sales and use tax. Another place where personal liability can apply is with withholding for employees, so you have to withhold the gross income tax for your employees. And if you don’t do that, then you can be personally liable.
0:19:00.8 Jamie M Zug: Everybody in the business can be personally liable. If you’re the person at the front desk who’s just answering phone calls, you know there’s a test that they have to go through it, but if you’re a person that has enough control over the business where they think it satisfies that test, then you can be personally liable for at least the withholding for employees and the sales and use tax and potentially other things, if you don’t have some sort of limited liability.
0:19:35.3 Kurt Baker: Okay, so the entity matters and then… And you have to pay very close to… Obviously, you need to pay your employee taxes because that’s… You’re collecting it from them, so to speak, and matching it. And then the sales and use, as you just point out, you’re really… You’re just the person with the money in the bag and you’re supposed to really bring it over to the government, it’s really not your money when you collect that, and sometimes people forget that, ’cause I’ve read stories about where people are like., “I had trouble with my cash flow, so I just kept that… The sales tax for the couple last few months.” Well, you really can’t do that, it’s not your money.
0:20:02.0 Jamie M Zug: And then, of course, you have people that aren’t imposing sales tax at all, people that were just doing cash businesses and so forth, so that’s another situation. And it’s not like because you can’t collect it you aren’t liable. In the end though, even though it’s really the buyer’s tax, they’ll hold the seller jointly and severally liable with the buyer.
0:20:21.2 Kurt Baker: Well, that’s interesting. Well, you bring up an interesting point. Now, what about internet sales and things like that, how does that fit into all this? Does it differentiate physical location in sales?
0:20:30.2 Jamie M Zug: There’s been a sea change and that… Not long ago at all, there was the Wayfair case. I don’t remember what year it was, but it really wasn’t long ago, It was maybe 2017 or 2018. So before that, you had to have physical presence in a state in order to have nexus with that state, such that they could tax you. Well, that’s no longer the case. You can have economic nexus with the state, and there are thresholds for that. Each state is gonna articulate them a little bit differently, but you can go on… The state provides information about which out-of-state businesses will meet those thresholds. Now, there two different questions, one is for an individual business that’s making sales off of its website directly, and then there’s also the question of somebody who’s using a marketplace facilitator, something like Amazon. In that situation, then you will have to pay tax. And Amazon was really smart. Even before Wayfair came out, Amazon was already doing that. So they sort of saw the writing on the wall, and that’s…
0:21:38.2 Kurt Baker: I do remember that when they collected fairly. And I think they caught a lot of heat from their people on the platform original.
0:21:41.8 Jamie M Zug: Right. Yeah, they did. But it was really prescient. So it was good that they had those systems in place. I think a lot of other people were scrambling to figure out what to do. And Amazon already did.
0:21:48.0 Kurt Baker: ‘Cause I remember it was actually kind of complicated from a tech standpoint, like, where’s the sale? Where am I?
0:21:53.4 Jamie M Zug: Sure.
0:21:53.9 Kurt Baker: So you had to figure out what’s the right tax and where do you send it. It wasn’t like, “Oh, you just flip a switch. They had to actually put the software in place.
0:22:00.3 Jamie M Zug: Exactly. And the difficulty is, because it’s a matter of state law, every single state has a different sales and use tax regime.
0:22:05.0 Kurt Baker: Wow.
0:22:06.0 Jamie M Zug: And some localities have sales tax. Like if you go to Colorado, your sales tax is gonna be completely different depending on what town? There are multiple levels. It’s municipal, county, state. And then there’s special districts too that also have sales tax. So it can get really complicated. Funny, I wasn’t planning on talking about sales and use tax today because New Jersey is… Our sales and use tax regime isn’t quirky. There might be some small quirks to it, but it’s sort of a run-of-the-mill sales and use tax regime compared to what some other states have.
0:22:39.8 Jamie M Zug: So that isn’t one that tends to… That’s not that people don’t get in trouble, right? Like you gotta actually collect the tax when you have to. And there can be some nuanced and interesting questions, but it’s not one with like where we’re really very different from the majority of cities.
0:22:55.2 Kurt Baker: So if I’m a small entrepreneur, I’m gonna start a little business. It sounds to me like you’re probably better off using one of these platforms that kind of calculates all this for you. Otherwise you’ve gotta kind of do this on your own, ’cause you’re still liable for it. If I set up my own little website, I say I’m gonna start collecting and selling widgets online, that doesn’t exclude me from needing to collect the sales and use tax. Whereas, if I’m using a platform that already has that technology in, and then at least I know that’s done. I don’t have to worry about that.
0:23:17.7 Jamie M Zug: Yeah, a lot of businesses with sales in many states end up end up spending a lot of money consulting lawyers about all the different states’ tax schemes. So it can be helpful to work with a platform that has it already figured out.
0:23:30.6 Kurt Baker: All right. Awesome. Better to be preemptive than reactive. Right? Take care of it ahead of time, then have to react to it later. All right. You are listening to Master Your Finance. We’re gonna take another quick break.
0:23:39.0 ANNOUNCER: We’re not just doing this for money, we’re doing it for a shit load of money. If you want to learn how to make and manage that kind of money, turn the volume up as we get back to Master Your Finances with Kurt Baker of Certified Wealth Management & Investment.
0:23:56.0 Kurt Baker: Welcome back. You’re listening to Master Your Finance. I am here with Jamie Zug, and we’re talking about taxes. So when you get into these little nichey areas better off hire the professionals, implement the technology, you can save yourself a lot of headaches. Just take care of it up front. I’ve always been a big believer in that. And that way you don’t have to deal with it later. Jamie, I know, I know I guess sales and use is not typically a big issue in New Jersey, but I know people need to pay attention to it. So I think that’s great advice. So what other areas in the state of New Jersey maybe are you… Have you seen, are you seeing from… I guess you’ve been on both sides of this fence, that people should keep their eyes and ears open to and be alerted to that they need to take care of it?
0:24:32.7 Jamie M Zug: Yeah, yeah, sure. And I don’t wanna say that sales and use isn’t an issue, it’s just that there don’t tend to be these sort of big surprises that taxpayers get in other setting. So one of the big surprises that taxpayers get is something that you mentioned earlier, Kurt, which is innocent spouse. So oftentimes you’ll have somebody who usually is an ex-spouse. Because if you’re functioning as an economic unit, then an innocent spouse finding might not actually be helpful. So oftentimes this will come up in… Not always, but oftentimes this comes up in the ex-spouse context.
0:25:12.5 Jamie M Zug: So say you have an ex-spouse who had a business and unbeknownst to you, they weren’t reporting some of their income or they just weren’t paying or what have you. Or sometimes a lot of the cases that come up for the division, the spouse might have been obtaining income in some sort of criminal way. So maybe something like that is happening. On the federal level, there’s an innocent spouse process. It’s not like everybody can qualify for it, but if you do, then you’re off the hook.
0:25:47.6 Jamie M Zug: This only is relevant to people who filed jointly. If you’re married, filing separately, you don’t have to worry about it at all. You’re not liable for your spouse’s taxes anyway. But if you’re married, filing jointly, then you’re jointly and severally liable for your spouse’s tax liability. So that’s when this innocent spouse process tends to help people. So people will go through the process, they’ll do all the work, they’ll get their innocent spouse determination from the IRS, and they’ll think that they’re free from their ex-spouses criminal or otherwise, from their ex-spouses tax…
0:26:31.5 Kurt Baker: And then here comes phase two.
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0:26:32.7 Jamie M Zug: Yeah. But then suddenly, you find out that you weren’t relieved with respect to New Jersey. New Jersey does not have a formal innocence spouse program. So you come to New Jersey and you think, “Well, I was granted innocent spouse relief.” And the division’s position is that New Jersey does not have an innocent spouse program. In fact, there have been bills introduced that would establish a New Jersey innocent spouse program, but they have not passed.
0:27:05.1 Kurt Baker: Interesting. Any speculation not to get too far into why that not… Because it seems to be fairly widespread now.
0:27:10.6 Jamie M Zug: Yeah, I think as a matter of policy, people will say like, “Well, you got the benefit of that money at the time. Like, maybe you didn’t know that your spouse was engaging in criminal activities but you were going on vacation with them.
0:27:23.9 Kurt Baker: Oh, I see.
0:27:24.0 Jamie M Zug: Which that does… There are a lot of assumptions in that, right? I mean, oftentimes the innocent spouse isn’t getting the benefit, maybe the ex-spouse is keeping that money for themselves or is sharing it with somebody outside of the marriage. There can be any numbers of variations on these faxes, I’m sure that you can imagine. And oftentimes, it ends up being very just devastating, and really it doesn’t feel like sound policy oftentimes. [laughter]
0:27:56.6 Kurt Baker: Yeah. ‘Cause this is my personal reflection, is typically when I see these areas of situation, you’ll have one person who’s kind of the dominant financial person, might be the business owner. The other one’s literally sitting home or taking care of the kids or has some small like micro business where just to keep them busy, and they’re really not involved and they don’t really care to know about this complicated large business this other person theoretically has.
0:28:16.5 Jamie M Zug: And if they’re doing all these things, they’re like, “I don’t even understand what they’re doing.” They’re just like, “Sign the return and be done with it.” I can see this poor person, like what should I have done at the time? I mean, ’cause because my response is like, “Okay, well, if this is happening, how do I respond when I’m signing this return?” Like what? Ask them to explain the whole return to me?
0:28:40.1 Jamie M Zug: Exactly.
0:28:40.5 Kurt Baker: I guess, it gets a little bit like, what do you really expect that other spouse to do that really has no idea what’s going on?
0:28:43.4 Jamie M Zug: Right, right. So right or wrong, that’s the division’s position. And that’s what they’ll… If you’re in tax court, that’s what they’ll be arguing. There’s no innocent spouse in New Jersey. That doesn’t mean that you can’t work with the division behind the scenes and share with them about your innocent spouse situation. You can share with them about what happened. You can share with them the IRS’s innocent spouse determination. You might find that the division in sort of an informal cooperative kind of situation, is willing to work with you. So New Jersey doesn’t have a formal innocent spouse program. That doesn’t mean that taxpayers should be shy in raising those issues when they’re working with somebody in the division.
0:29:40.6 Kurt Baker: Okay. Well, that’s interesting. So do they… There’s a number that’s owed. Are they gonna like shift that to the non-innocent spouse, for lack of a better term? Or do they just say, “We’re gonna… We’re going out for a number.”
0:29:49.0 Jamie M Zug: Well, They’re going after the non-innocent spouse anyway. So the way joint self-reliability works, it’s not like…
0:29:54.9 Kurt Baker: They don’t care.
0:29:56.0 Jamie M Zug: It’s not like you’re each liable for half, you’re each liable for all of it. So they’re already going after that other spouse. And they’ll be going after that another spouse either way.
0:30:03.9 Kurt Baker: So they just say, “Hey, look, if you give us X dollars, then we’ll leave you alone from now on kind of deal.” Is that…
0:30:08.4 Jamie M Zug: Maybe.
0:30:08.5 Kurt Baker: I mean, they may not get the other money ever.
0:30:09.2 Jamie M Zug: Maybe. It depends. You could even… They have a lot of discretion. When they’re administratively working with taxpayers, they have a lot of discretion. So the best outcome would obviously be for them to say, “We’re gonna relieve this debt entirely.” Or it could be some sort of middle position, like you said, like some sort of compromise or they could hold to that hard and fast line and say, “Sorry, no, innocent spouse in New Jersey.” You don’t really know until you have that conversation. But I wouldn’t be discouraged from pursuing the conversation just by the formal position that the program doesn’t exist.
0:30:57.2 Kurt Baker: Okay. So bottom line is there is hope.
0:31:00.1 Jamie M Zug: There is hope.
0:31:00.2 Kurt Baker: If you have a legitimate story, please tell the story.
0:31:03.2 Jamie M Zug: There is hope.
0:31:03.3 Kurt Baker: And document what happened.
0:31:05.3 Jamie M Zug: Yeah. And I also have… This stuff does come up in litigation. I think that there are real legal arguments to be made here too. So just because there isn’t a statute there doesn’t mean, even from a litigation standpoint, that there aren’t arguments to be made. The problem is oftentimes, to get to the litigation, you have to be able to afford it. And although there’s an exception to that, this is important. This is new. There’s the… Ellis & Jay Legal Services of New Jersey has a new state tax program. And they generally just refer the cases to attorneys for folks who are in tax court. But if you have some tax situation with the division, call Ellis & Jay and see if you income-qualify for some help.
0:32:02.0 Jamie M Zug: So there are the folks on the low income end who might be able to get help that way, depending on their situation. There are the folks on the very high income end where it’s gonna be worthwhile for them to… Well, not necessarily high income, but there’s a lot of money at stake ’cause you could have high income but not have very much money at stake in the situation. But let’s say you do have a lot of money at stake, then you could litigate it and maybe try and make some arguments in tax court. But a lot of people are gonna be in the middle. They’re not gonna qualify for the pro bono help, and they’re not going to have enough money at stake to make it worth pursuing in court. And for those people, which is gonna be a lot of people, that’s where just having these conversations and really working with the division behind the scenes can be a good path.
0:32:50.1 Kurt Baker: Well, there’s another place where communication matters and getting in front of it getting… Because I think the sooner you address it, the more likely the department’s gonna be at least empathetic to the situation. Like, “Hey, you’re not hiding from us.” At least you’re willing to come forward and say, “Look, oh, I didn’t know what’s going on. Let’s figure this out. Let’s get it done.”
0:33:05.1 Jamie M Zug: Yeah, that’s right.
0:33:06.6 Kurt Baker: Because they wanna get behind them too, I’m assuming, and move on to the next thing. They don’t want to have this hangout for years.
0:33:12.2 Jamie M Zug: Absolutely.
0:33:12.9 Kurt Baker: Okay. So that’s in everybody’s best interest to get it going. Okay. Anything else that we should be kind of paying attention to here and…
0:33:17.9 Jamie M Zug: Sure. Well, honestly, there’s a lot, like New Jersey does have have a lot of quirks. Just sticking with gross income tax for a moment, New Jersey’s, gross income tax actually doesn’t follow federal income tax at all. It’s a completely different situation. A lot of states will just say… Well, they’ll maybe follow federal scheme and make some modifications. New Jersey just started from scratch. They said, this is gonna be the scheme. So there are specific categories of income that are taxable in New Jersey. Much more limited deductions. All the deductions that you might care about for your federal taxes, like charitable deductions or mortgage interest those are not gonna apply in New Jersey.
0:34:04.0 Jamie M Zug: IRA contributions. So there are a lot of things that you won’t be able to deduct in New Jersey that you deduct on the federal level. And then there’s also limited netting. If there are some losses or expenses that you wanna apply against against your income, you won’t be able to apply that against your income as a whole. You’ll just be able to net within the specific category. So 17 different categories, you can just net within those categories. So that’ll affect some folks as well.
0:34:35.7 Kurt Baker: So it’s really important to have a good accountant that knows the differences between the state and federal.
0:34:40.4 Jamie M Zug: That’s right.
0:34:41.0 Kurt Baker: This is where it doesn’t… You can’t… It’s not so easy to do this, like on the online stuff. This is where you probably need some expertise involved.
0:34:46.6 Jamie M Zug: Right. And some of this might seem self-serving since I’m a tax attorney, but to be honest, a lot of what we end up saying to people is, talk to your accountant. Talk to your accountant. Talk to your accountant. And having a good accountant who’s experienced with whatever it is you’re doing, if it’s a multi-state business, having an accountant who’s good at that, or if you’re just an individual, having an accountant that’s good at that, your accountant is gonna be the person that can do all this well.
0:35:08.2 Kurt Baker: Well, I agree 100% with that. We’re gonna take another quick break. You’re listening to Master Your Finances.
0:35:14.4 ANNOUNCER: Do you want to prevent this from happening to you?
0:35:17.5 ANNOUNCER: And it’s gone. It’s all gone.
0:35:20.2 ANNOUNCER: Listen closely as we now return to Master Your Finances with Kurt Baker of Certified Wealth Management & Investment.
0:35:28.2 Kurt Baker: Welcome back. You’re listening to Master Your Finances. I’m here with Jamie Zug and we’re talking about taxes and how to minimize your interaction with the state and federal agencies in a negative way. They’re nice people, I’m sure, but we really don’t want to be getting letters from them at all possible. Unless it’s saying, “Here, here’s your refund.” [laughter] Other than that, usually it’s not good. So we talked a lot about the personal stuff. So a lot of businesses in New Jersey. Maybe what are some things that business owners should be aware of and maybe planning for as far as their tax situation goes?
0:35:55.0 Jamie M Zug: Sure. Lots of quirks when it comes to businesses too. One is that New Jersey has a longer statute of limitations for assessment. So on the federal level, and in a lot of states, the taxing authorities only have three years to impose additional tax. That’s true for gross income tax in New Jersey. It’s not true for any other New Jersey tax. Any other New Jersey tax are gonna have four years. And there are exceptions even at the federal level and at the state levels. And there are exceptions in New Jersey. For fraudulent returns, they have an unlimited statute, so they can come after you 30 years later if it’s fraudulent return.
0:36:35.2 Jamie M Zug: But the four years is one thing that… You can’t rest easy until four years have passed. It’s not just three years. And then another issue that comes up is the apportionment method. So this is for multi-state businesses. When you’re a multi-state business, it’s not like every business that you’re in gets to tax 100% of your income. If that were the case, you would be paying more tax…
0:37:01.5 Kurt Baker: You’ve worked out.
[laughter]
0:37:02.5 Jamie M Zug: Yeah. You’d be paying more tax than you’d be making. So for every state, there’s gonna be a question of how much can they apportion? And every state is gonna have a different formula that’s gonna get you there.
0:37:15.0 Jamie M Zug: In New Jersey the apportionment method that the state use is going to depend on whether you’re incorporated which is a surprise. It’s not like it’s just one formula that they’re gonna use for all businesses. They’re gonna use a different formula if you’re incorporated versus when you’re not. Who does this impact? It impacts people who have property and payroll, and that includes rental property. So if you have a rental property and payroll in New Jersey, and you’re an unincorporated business, so you’re paying tax let’s say your business taxes, your business is treated as a partnership for tax purposes, let’s say, then your taxes are gonna be higher in New Jersey than if your property and payroll were out of New Jersey. Because New Jersey is gonna look at that property and payroll and they’re gonna say “Okay, we can tax more of this person’s business than if they didn’t have this property and payroll in New Jersey.”
0:38:15.0 Jamie M Zug: If that same business was an S-corporation or if that same business was a C-corporation, then New Jersey wouldn’t look at the property and payroll at all, they’d just look at sales. So if you were selling, let’s say you have a third of your sales in New Jersey, a third in New York, and a third in Pennsylvania. New Jersey, if you’re incorporated, is only gonna tax a third of your income. But if you’re not incorporated and you have let’s say you rent office space and you have an administrative assistant, they’re gonna count that office space and administrative assistant against you. Sales will now only account for a third of the formula. A third of the formula is gonna look to office space. You only have one office space, and it’s… Or sorry, to property. You only have one office space, and it’s all in New Jersey, so that’s 100% of that gets taxed in New Jersey, 100% of the payroll gets taxed in New Jersey. So instead of being able to tax a third of your income, they can tax more than two-thirds of your income.
0:39:12.7 Kurt Baker: Is it the entity? Let’s say I’m an LLC, if I’m taxing being… Well S-corp you can elect how you get taxed. If you’re… Is it a matter of how you’re submitting the tax return itself or it’s the structure itself? So if I have an LLC or if I have an S-corp, as long as it’s the corp or an LLC is that okay? I just wanna make sure I’m clear on which entities we have to be concerned about and which entities we’re good with.
0:39:36.5 Jamie M Zug: The question is whether you’re paying corporation business tax or whether your business tax…
0:39:40.0 Kurt Baker: Okay. It’s a pass-through?
0:39:41.1 Jamie M Zug: Right. If it’s a pass-through, that’s the ones that this affects.
0:39:42.4 Kurt Baker: Got it. Okay. So pass-through entities. Got it.
0:39:43.9 Jamie M Zug: Right. So if it’s coming through onto your gross income tax, that’s when property and payroll is gonna matter. Now, this can cut both ways. If you have property and payroll outside of New Jersey, then that’s gonna be a benefit to you. So it’s not like it’s bad. And obviously, there are a lot of considerations here too. It’s not like, Oh, well this is true, so now I should definitely become an S-corp or I should definitely become a corporation. It’s just sort of one data point in a bigger picture when it comes to the choice of entity, but it’s one data point that I think people don’t know it’s there. They don’t realize that New Jersey is applying… That the rules are different when it comes to the flow-through businesses as opposed… The pass-through businesses as opposed to the incorporated businesses.
0:40:32.9 Kurt Baker: Okay. Good point. Okay. What else they got in store for us out there?
0:40:37.6 Jamie M Zug: So there’s even more.
0:40:40.5 Kurt Baker: And more.
0:40:43.6 Jamie M Zug: Yeah, something to think about. This is a little thing, but for folks whose businesses own property, let’s say you own commercial property, oftentimes people will own commercial property through an entity, and it might be that that entity, all it does is it just holds title for that property. It doesn’t do anything else. That can really give you an advantage in New Jersey. And the reason is because of real property transfer fee in New Jersey. The real property transfer fee will only apply when you’re transferring real property. But if you have an entity that owns the property then you can transfer the entity instead of transferring the property and avoid real property transfer fee. Now, a lot of states have caught on to this idea.
0:41:31.5 Kurt Baker: I remember when Philly caught on. I remember this years ago, that’s what you made me think of when you said that.
0:41:35.9 Jamie M Zug: Right, right, right. A lot of states have caught on to this idea, so they try to get that revenue in other ways including New Jersey, but there are limits to it. So it’s the controlling interest transfer tax, and it only applies when the price is over a million dollars. So if you have a commercial property that’s valued under a million dollars, you won’t have to pay controlling interest tax. And if you just transfer the ownership of ABC LLC, whatever, to somebody else instead of transferring the property, then you’re gonna avoid real property transfer tax.
0:42:15.0 Kurt Baker: So I create an entity for every X square feet so I keep the value under 100,000, under a million. So my building now has four corporations ’cause it’s a $4 million building.
0:42:26.3 Jamie M Zug: Yeah, I’m not sure.
0:42:27.1 Kurt Baker: They may not buy that.
0:42:28.1 Jamie M Zug: I’m not sure that that would work out. It’s…
0:42:30.9 Kurt Baker: I’m kidding, I’m kidding, I’m kidding. It’ll be kind of expensive to condo the thing out.
0:42:34.7 Jamie M Zug: But you know, it sounds silly, but it’s actually a question.
0:42:38.2 Kurt Baker: Condo it out.
0:42:38.3 Jamie M Zug: I know that those situations, I believe are addressed explicitly in the New York guidance. I’d have to look and see whether New Jersey has anything explicit about that.
0:42:49.8 Kurt Baker: Interesting. I would think it would literally be like, in my example, four condo in the building. And you create a legal kind of mess when you sell it because then you go like, “Oh, we actually own like four condos instead of one building.”
0:43:01.9 Jamie M Zug: Right. It’s probably addressed in the guidance. I just… And I…
0:43:04.6 Kurt Baker: Interesting. It’d be… It could be… Okay.
0:43:09.2 Jamie M Zug: It’s not so straightforward that I’m like, Oh yeah, that wouldn’t work. I’d have to think about it, think about… Think of it, but…
0:43:12.3 Kurt Baker: Right. So the entrepreneur thinks that way. That’s all I could tell you.
0:43:15.6 Jamie M Zug: No, and with good reason. Even if the controlling interest transfer tax applies, the rates are different. So another question is to ask which one is better? Is it better to pay the controlling transfer tax versus real property transfer tax? And the breaking point is right around 1.2 million below one… So if you’re between a million and 1.2 million, then the real property transfer tax is gonna be lower. Not much lower. We’re talking about a few hundred dollars, so it’s that. But once you get past the 1.2 million then the controlling interest transfer tax is gonna be lower.
0:44:01.9 Kurt Baker: Interesting. All right. So they’re gonna get us no matter what. Somehow. They’re gonna get their little piece of the pie, get their little commission when you sell something. Okay. What else we got out there for business owners?
0:44:18.3 Jamie M Zug: Another thing is that certain types of depreciation that apply on the federal level don’t apply in New Jersey, so that’s something to be mindful of. The partnership filing fee, if you’re taxed as a partnership, then you’re gonna be subjected to $150 filing fee for each partner, and that might not matter unless you have a lot of partners or a lot of partnerships. I’ll give you an example. There were three friends who made three partnerships and for something that they were just interested in. It wasn’t a serious business idea, and they never did anything with it. And then they never paid their partnership filing fees. And then years passed. So you had three partners, three businesses, years passing, $150 each filing fee.
0:45:16.3 Kurt Baker: 450 for… Yeah.
0:45:19.8 Jamie M Zug: And so that… You can imagine these weren’t wealthy individuals. So that really added up. So think about it, just think about it. Just think about partnership filing fees. It is capped at 250,000, so if you’re on the high end and you have a lot of partners, there’s a cap. But there’s a long way to get to that…
0:45:31.8 Kurt Baker: It’s a lot of partners.
0:45:32.0 Jamie M Zug: Yeah, there’s a long way to get up to that cap. So yeah, something else to be aware of to.
0:45:35.0 Kurt Baker: Awesome.
0:45:36.1 Jamie M Zug: Creating partnerships willy-nilly probably won’t be the best.
0:45:37.9 Kurt Baker: Yeah, don’t create them unless you’re gonna use them, that I do know, ’cause it doesn’t make a whole lot of stuff.
0:45:41.3 Jamie M Zug: Yeah, yeah. Put a little thought into it. And then one other thing is protective refunds. So a protective refund is something that taxpayers will often use. Let’s say that you might be entitled to refund, but it’s not sure, there’s some sort of contingent event, something that may or may not play out some way. In a lot of jurisdictions what you wanna do is you wanna file a protective refund. So that way, you make sure that you don’t lose that window of time in which to file the refund. New Jersey’s position is that there aren’t protective refunds in New Jersey, and that’s very tricky because they’ll say it’s unripe. They’ll say because that hasn’t played out yet, this isn’t ripe.
0:46:27.6 Kurt Baker: Isn’t ripe?
0:46:27.7 Jamie M Zug: Isn’t ripe. Right.
0:46:29.8 Kurt Baker: It is the Garden State, so it’s not ripe, apparently.
0:46:31.2 Jamie M Zug: Right. Yeah, it’s not ripe. But then there’s this really tricky thing where you’re not ripe, not ripe, not ripe, then you’re out of time.
0:46:38.5 Kurt Baker: Oh goodness.
0:46:41.4 Jamie M Zug: So it’s something that… It’s something tricky to look out for. If you’re getting some pushback and people are saying it’s un-ripe just pay attention to that deadline because the deadline is gonna come, and you wanna get something filed one way or the other before the deadline.
0:46:57.0 Kurt Baker: Oh my word. So you gotta really pay attention… So in other words, read the notices and be careful about what it says and pay attention and then respond, and I guess call the agency if you’re not sure what to do, I would assume.
0:47:06.9 Jamie M Zug: Right, right, right, right. And obviously consult with your accountant. But that’s not it, right? That’s some of the New Jersey tax quirks. It’s certainly not all you could talk about when it comes to New Jersey tax, but I think that those are a lot of the New Jersey surprises. The New Jersey surprises that people tend to encounter.
0:47:30.5 Kurt Baker: Well. That was awesome. Any final thoughts before we head out? ‘Cause it was very interesting, quite frankly.
0:47:36.1 Jamie M Zug: No, no, final thoughts. Yeah, just to repeat what I just said and what we said earlier, keep close to your accountant.
0:47:45.7 Kurt Baker: Right. Absolutely. I agree with that 100%. You’re listening to Master Your Finances. Have a wonderful day.
0:47:53.1 ANNOUNCER: That’s all for today’s episode of Master Your Finances. Missed Kurt Baker’s biggest money managing tip or even a full episode? Head on over to masteryourfinances.us or 1077thebronc.com/masteryourfinances. Look for Master Your Finances on Anchor, Spotify, or anywhere you get your podcasts. We’ll see you next time, only on 107.7 The Bronc.
