Make Extra Mortgage Payments, Get A New State Tax Credit

Homeowners in high-cost New Jersey could get a small NJ tax break as GOP still pushes for federal tax changes harmful to the state.

Citing a need to do more to help middle-class residents build up home equity in high-cost New Jersey, lawmakers are proposing a new tax credit that would reward homeowners for making extra mortgage payments.

The proposed new tax credit is being modeled on a similar piece of federal legislation, and the state version would be worth as much as $1,000 annually if legislation now under consideration in the State House becomes law.

The push to encourage homeowners to get ahead on their mortgages also comes as the GOP-led Congress is considering making permanent a series of federal tax-code changes that are expected to hurt many New Jersey residents and the state’s housing market. These include a cap on a longstanding federal write-off for state and local taxes known as SALT.

New Jersey recently expanded its own state income-tax deduction for local property taxes in response to what’s been happening at the federal level. Creating a new tax break for early mortgage payments would also help address the affordability issue in the face of the federal tax changes, according to the bill’s sponsors.

“We wanted to be in a position to counterbalance some of the things that we saw coming out of Washington,” said Sen. Troy Singleton (D-Burlington). “The fundamental point is to allow folks to really get more resources that they can use for other things, and to use the equity in their home as early as they can.”

The SALT assault

Among the many tax changes that President Donald Trump signed into law late last year was a $10,000 limit on the federal SALT deduction, which had previously been uncapped for over a century. New Jersey residents cherish the deduction, as it has helped to offset the cost of the state’s highest-in-the-nation local property taxes. Originally set up to expire in 2025, the SALT cap is being considered for inclusion as a permanent part of the tax code by Congress.

State Attorney General Gurbir Grewal is participating in a multistate lawsuit that was filed earlier this month in federal court to challenge the new limit on the SALT deduction. The suit wants the $10,000 cap to be declared unconstitutional, in part on the grounds that it intrudes on the well-established taxing authority of the states. Meanwhile, state lawmakers also worked with Gov. Phil Murphy in recent weeks to expand New Jersey’s income-tax write-off for local property taxes, lifting the cap on the state’s deduction from $10,000 to $15,000.

Under Singleton’s proposed tax-credit legislation, New Jersey’s middle-class homeowners could also qualify for an up to $1,000 annual tax credit on their state income-tax liability if they make early payments on 15- or 30-year home mortgages.

Homeowners earning up to $125,000 annually, or married couples earning up to $250,000 annually, would be eligible to receive the largest tax credits, which would be worth up to 50 percent of their mortgage prepayments, capped at $1,000. Homeowners earning up to $135,000 annually and married couples earning up to $270,000 annually could also qualify for less generous tax credits, according to the legislation, while anyone making over those amounts would not be eligible for any tax break.

The credit could be taken for up to 10 years, and it would be available for those who have either a home mortgage for their primary residence or a refinanced mortgage that requires payments to be made in regular intervals.

Impact on state’s tax revenue not clear

Singleton said the legislation is modeled on a similar effort by Democrats at the federal level, the Building Equity for the American Middle-Class Act. It also follows an approach that’s generally encouraged by financial advisors as homeowners can realize significant interest savings over the life of a long-term mortgage if they are able to pay more each month or make one additional mortgage payment each year.

“We look at this as an opportunity to further expound on the stuff we’re trying to do to not only help and promote homeownership, but in this instance to promote equity in peoples’ homes, and to use our tax code to do that,” Singleton said.

It’s unclear how much income-tax revenue would be lost by the state if the mortgage-prepayment write-off is eventually enacted. The nonpartisan Office of Legislative Services will be preparing a routine fiscal estimate for the legislation, Singleton said.

But he also suggested any revenue loss could be made up in the long run if the tax credit ends up strengthening the state’s middle class, and if it encourages more residents to remain in New Jersey instead of leaving for other states where the total state and local tax burden is much lower.

“If you look at the opportunity to counterbalance what can happen, in terms of lost revenue, and what this means as another added incentive for homeownership and for folks to stay in the state, we think this is something that we can deal with,” Singleton said.

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