The New Jersey ANCHOR program is meant to provide property tax relief. Residents of New Jersey who own or rent their principal residence are eligible provided they meet certain income limits. Notices recently went out in the mail. If you did not receive your notice, you can still apply.
New Jersey does not tax these payments; however, there has been some confusion on their effect on Federal Income Taxes. On August 30, 2023, the Internal Revenue Service published Notice 2023-56, which “provide[s] guidance on the federal tax status of refunds of state or local taxes and certain other payments made by state or local governments to individuals.” This should include the ANCHOR benefits. For taxpayers who take the standard deduction, there is no effect on their tax return. Taxpayers who itemize will need to reduce their state and local tax (SALT) deduction by the amount of the ANCHOR payment.
Although the IRS issued some guidance on similar types of payments in the news Release IR-2023-23, that guidance only related to payments made in 2022. The IRS continued to receive requests from taxpayers on the consequences of payments made this year and moving forward, so the new Notice was published, and comments have been requested.
Generally, all income from whatever source is taxable; however, there are certain exceptions written into the Internal Revenue Code. State tax refunds can be such an exception, but it is not guaranteed, and whether the State considers the payment taxable is not controlling. Whether or not the ANCHOR payment is includable in a taxpayer’s Federal gross income depends on the “tax benefit rule” (the “TBR”). The Notice provides a good analysis of the TBR. “The tax benefit rule generally requires a taxpayer to include in Federal gross income an amount recovered during a taxable year that the taxpayer deducted for Federal income tax purposes in a prior taxable year to the extent the Federal income tax deduction reduced the taxpayer’s Federal income tax liability in the prior taxable year.” If you deducted state taxes on your tax return last year and it reduced your taxable income, you will need to include the amount of the ANCHOR payment if you received a Federal income tax benefit from a prior deduction.
The Notice did not specifically address whether a taxpayer who used their maximum SALT deduction allowance but also received a property tax refund should report their ANCHOR payment. The 2017 Tax Cuts and Jobs Act capped SALT deductions at $10,000. In some towns in New Jersey, houses assessed at as low as $380,000 can have property taxes of more than $10,000. It might be logical to conclude that if you had more than $10,000 in SALT deductions and the ANCHOR payment would not lower that number below $10,000, the ANCHOR payment should not have to be included on your tax return for 2023. However, we will have to wait and see if the IRS issues further guidance on that.
Comments about the notice are due to the IRS by October 16, 2023. Taxpayers can file comments electronically at https://www.regulations.gov and searching for IRS-2023-0033. They can also be mailed to the IRS at Internal Revenue Service, CC:PA:LPD:PR (Notice 2023-56), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Please remember if you choose to comment that your comments will be published to the public.