For the 2009 NJ Composite Tax Return Rates, recent legislation (P.L. 2009, c. 69) temporarily raises the Gross (Personal) Income Tax rates for high income New Jersey taxpayers. Taxpayers with income of more than $400,000 per year will see their New Jersey income tax rate rise from 6.37% to 8%. Those who earn $500,000 to $1 million will see their tax rate increase from 8.97% to 10.25%. Income in excess of $1 million will be taxed at 10.75%. The increases are effective for 2009 and retroactive to January.
Despite rules requiring income taxation on composite returns at the highest personal income tax rate, the New Jersey Division of Taxation is allowing the use of two rates in order to encourage nonresident individuals to elect to participate in a composite return. This extends an administrative practice initially adopted for tax year 2004, the year New Jersey first imposed a “Millionaire’s Tax” rate on high income taxpayers.
The Division has announced that, for 2009, a nonresident individual electing to participate in a composite return may continue to apply the lower 6.37% rate if the participating individual has New Jersey sourced income from the entity of less than $250,000. The new highest rate of 10.75% is applied to participants with New Jersey sourced income from the entity of $250,000 or more.
Since 1996, composite returns have offered nonresidents with limited New Jersey sources of income the option of not filing an individual New Jersey non-resident income tax return. Instead, certain entities doing business, conducting activities in New Jersey or having income from or connected with sources within New Jersey may file a composite return on behalf of its qualified nonresident individual members An entity’s filing of a composite return eliminates the need for eligible nonresident owners to file a New Jersey non-resident income tax return.
Composite returns have been a convenient and popular choice for qualified nonresidents. But that convenience comes at a cost. Participating nonresidents must agree to have their tax calculated directly on the entity income at a specified rate and elect to participate in a composite return prior to its filing.
Even with the imposition of the highest individual income tax rate, nonresident individuals participate in composite returns as a matter of convenience. With the continued availability of two income tax rates, participation in a composite return will remain for many an acceptable alternative to filing an individual NJ-1040NR return.
Who Can Join In a Composite Return
Only qualified nonresident individuals can participate in a composite Gross Income Tax return, Form NJ-1080C. They do not have to file their own income tax return with New Jersey. To qualify the individual must meet the following criteria:
- The individual was a nonresident for the entire year.
- The individual did not maintain a permanent place of abode in New Jersey at any time during the year.
- The individual was not a fiscal filer.
- The individual did not have any income derived from or connected with New Jersey sources other than the income reported on composite returns.
- The individual waives the right to claim any exemptions, deductions, or credits and agrees to have the tax calculated at the highest rate in effect for a single taxpayer.
- The individual elects to be included in a composite return by completing and delivering to the filing entity form NJ-1080-E.
Entities Eligible to File a Composite Return
Entities eligible to file composite returns on behalf of their members are:
- Professional Athletic teams
- Limited Partnerships
- Limited Liability Company
- Estates and Trusts
- New Jersey Electing S Corporation
Effect of Joining a Composite Filing
The filing of a composite return is considered a group of separate returns meeting the individual filing requirements for each qualified electing nonresident participant as required by the New Jersey Gross Income Tax Act. However, the Director reserves the right to require the filing of an NJ-1040NR by any individual who participates in a composite return.
An election to participate in a composite return must be made annually. This election is binding and may not be revoked after April 15 following the close of the tax year to which the election applies.