We have seen some significant movement in federal tax regulations recently, and for residents of New Jersey, the implications are worth reviewing. The new federal law projects an average savings of roughly $3,700 for New Jersey residents, with those in counties like Morris and Bergen potentially seeing higher averages. While the legislation permanently extends the 2017 tax rates, it also introduces a variety of new deductions and specific caveats that require close attention.
The Standard Deduction and the SALT Cap
One of the headline changes is the increase in the Standard Deduction. The amount taxpayers can subtract from their income tax-free has risen to $15,750 for single filers and $31,500 for married couples filing jointly.
Simultaneously, there has been a change to the State and Local Tax (SALT) deduction cap. Previously limited to $10,000, the cap has been raised to $40,000. On the surface, this appears to be a major win for New Jersey homeowners who pay significant property taxes. However, there is a functional conflict between these two changes.
To claim the SALT deduction, a taxpayer must itemize their deductions. Because the Standard Deduction has increased significantly, experts estimate that approximately 90% of filers will choose the Standard Deduction rather than itemizing. Consequently, while the SALT cap has increased, the majority of filers may not utilize it. Additionally, the SALT benefit begins to phase out for households earning over $500,000.
New Income Exemptions: Tips and Overtime
The new legislation treats exemptions for tips and overtime pay differently than the SALT deduction. These specific deductions can be claimed in addition to the Standard Deduction. It is important to note that these federal breaks are set to expire at the end of 2028, and New Jersey state taxes may still apply to this income.
For tips, taxpayers may deduct up to $25,000. This is available to single filers earning up to $150,000 and joint filers earning up to $300,000.
The rules regarding overtime pay are more complex. You may deduct up to $12,500, subject to the same income limits as tips. However, this deduction applies strictly to the "premium" portion of the pay. If you are paid time-and-a-half, the deduction applies only to the extra "half" portion of your hourly rate, not the base pay associated with those hours.
Additional Adjustments
There are several other adjustments in the new law regarding credits and contributions:
Child Tax Credit: This has been increased from $2,000 to $2,200.
Senior Deduction: This increases by $6,000 for seniors earning under $75,000 (or $150,000 for joint filers).
Car Loan Interest: Taxpayers may deduct up to $10,000 in interest on loans for new, U.S.-made automobiles, subject to income limits.
Retirement Contributions: The limit for catch-up 401(k) contributions has increased to $11,250 specifically for individuals aged 60 through 63.
New Jersey State Considerations
While the changes above are federal, it is useful to remember existing benefits specific to New Jersey state tax filings. Tenants may deduct up to 18% of rent paid in 2025. Furthermore, the threshold for deducting medical expenses is lower for state taxes; you may deduct expenses exceeding 2% of your income on your state return, whereas the federal threshold is 7.5%.
Tax laws are dense, and the interaction between federal and state regulations can be complicated. As we move into this new tax environment, ensure you are looking at how these specific numbers apply to your personal financial situation.