NJ Real Estate Tax Deduction - Married Filing Separate

[superman23]

I think there is a flaw in the system. Married Filing Separate - NJ resident return. Both taxpayer and spouse own home jointly and each claim half their total ($12,000) real estate taxes. So, for each, $6,000 is entered in the federal input. They each claim the standard deduction so it doesn't matter on the federal return. These amounts should flow thru to their separate NJ returns. But on the taxpayer's return, the program gives him half the deduction, $3,000. He should, of course, get $6,000. The spouse's return is correct - she gets a $6,000 deduction. I found where I can correct the taxpayer's return, but this shouldn't be necessary. It would be easy for someone to miss this if they are not paying close attention. Any thoughts?

[ThomasM125]

To file married-separate on your state returns, you need to complete two separate federal tax returns. I think what may have happend is you enterered the real estate tax correctly on one of the federal returns, as $6,000, but on the other one you entered it incorrectly as $3,000. If so, it was an entry error, not an error in TurboTax.

[chz]

I agree there is a flaw. Here's what happens:

Suppose you have 10k in property taxes, married filing separately.

In order to properly fill out your federal return, you only claim 50% of what shows up in your 1098. Including mortgage interest paid and property taxes. So you enter in 5k property tax, and your federal return computes correctly. So far, so good.

Then TurboTax imports your Federal numbers into NJ. In particular, it imports 5k in property taxes. Then, if you go to 'forms' you can see that NJ-1040 automatically halves that down to 2.5k due to your married filing separately status. So you are only getting credit for 1/4 of the tax paid, instead of 1/2.

To fix this, you need to manually correct the 'property tax paid' to the full amount (10k) in the NJ deductions and credits. I consider it an oversight that TurboTax doesn't handle this well automatically, or at least warn users with 'married filing separately' status that this could be an issue.

[maglib]

@superman23 

Your New Jersey filing status must match your federal filing status unless you meet an exception or have a special circumstance.   Are you MFS for Federal too?

SALT limits your state and local income tax deduction to $10k for MFJt, which is limited to $5k each for MFS. This is the same in NJ.

during the interview for your return did you say you only own half so that TT then halved the amount you input?  It is strange if you did your federal return both the same way and had 2 different NJ results so I am guessing it was during the Federal interview an input error.

[superman23]

I posted that about a year ago while preparing a 2022 tax return. I have been working on the 2023 return and found the same issue. I think chz explained it perfectly. This is clearly a TurboTax issue, and you do. in fact, need to change the real estate taxes on the NJ input to reach the correct result. There was no input error on my part - neither federal nor NJ.

Also, please note that the SALT limitation does not affect the deduction NJ allows for real estate taxes. NJ does not allow itemized deductions, but NJ does allow a deduction for real estate taxes paid on a principal residence.

Please respond if any further questions.

Thanks.

[DJR123]

Noticed, this for the first time last year, so corrected it. Checked 2022 return and it had the same problem.  Not sure how many previous years this was happening that didn’t notice.