New Jersey · the return
How New Jersey income tax works: its own categories of income, no standard deduction, 1.4% to 10.75%
A walk down Form NJ-1040 from the first line to the last: why the return never looks at federal adjusted gross income, the eleven categories of income and the rule that a loss in one never touches another, the small exemptions that stand in for a standard deduction, the short list of deductions led by property tax, the graduated rates, the credits, and how the money gets paid in. For anyone who files here.
By Charles Trautman, EA, editor
Need to Know Tax · written from New Jersey Division of Taxation (Department of the Treasury) sources, November 3, 2026; updated November 12, 2026 after the election · not yet reviewed by a New Jersey practitioner
New Jersey’s return does not begin where most state returns begin. Form NJ-1040 never asks for federal adjusted gross income or federal taxable income. It builds its own number from scratch: eleven categories of income, each figured under New Jersey’s rules, added together on Line 27. Everything the federal return does with deductions is irrelevant here, because the Gross Income Tax Act adopts pieces of the Internal Revenue Code one at a time and has adopted very few of them. There is no standard deduction, no itemizing, no deduction for IRA or 403(b) contributions, no qualified business income deduction, and none of the 2025 federal deductions for tips, overtime, seniors or car-loan interest. In their place are $1,000 and $1,500 exemptions, a property tax deduction of up to $15,000, a medical deduction over 2% of income, and rates that climb from 1.4% to 10.75%. Social Security is not a category of income at all. No city or county in the state taxes income.
That structure explains most of what surprises people about this return. A capital loss does nothing for a wage earner, because losses stay inside their category. A teacher’s 403(b) contribution is taxed the year it is made, so Box 16 of the W-2 is larger than Box 1. And the Division of Taxation, the Department from here on, said in December 2025 that the federal tips, overtime and senior deductions “do not affect” the New Jersey return, which is less a policy choice than a description of the form: those deductions come off a federal number New Jersey never uses.
Who files
A resident with gross income over $20,000 on a joint, head of household or qualifying widow(er) return, or over $10,000 single or married filing separately, must file the NJ-1040. Those thresholds are not indexed. Below them, filing is still worth doing to recover withholding or to claim the refundable credits, and a filer 65 or older, blind or disabled who is under the threshold can claim the $50 property tax credit on the NJ-1040 or on the one-page Form NJ-1040-HW. Married couples and civil union partners use the same filing status they used federally, with one difference the federal return does not have: civil union partners file jointly here even though the IRS treats them as single. Nonresidents and part-year nonresidents file the NJ-1040NR, covered in Moving to New Jersey.
Where it starts: eleven categories, Lines 15 through 26
The income section of the NJ-1040 is a list, and each line is its own world.
| Line | Category | New Jersey wrinkle |
|---|---|---|
| 15 | Wages, salaries, tips | Use W-2 Box 16, not Box 1; only 401(k) deferrals are left out of wages |
| 16a | Taxable interest | U.S. Treasury and New Jersey bond interest is exempt and goes on 16b |
| 17 | Dividends | Taxed at ordinary rates; no qualified-dividend rate |
| 18 | Net profits from business | Schedule NJ-BUS-1; New Jersey depreciation, no bonus, section 179 capped |
| 19 | Net gains from disposition of property | Schedule NJ-DOP; ordinary rates; losses offset gains only, no carryforward |
| 20a | Taxable pensions, annuities, IRA withdrawals | Contributions New Jersey already taxed come back tax-free; exclusions on Line 28 |
| 21–22 | Partnership and S corporation income | Business categories; the Alternative Business Calculation lets losses here offset other business income |
| 23 | Rents, royalties, patents, copyrights | A rental loss is entered as nothing, not as a negative |
| 24 | Net gambling winnings | Losses net against winnings; New Jersey Lottery prizes of $10,000 or less are exempt |
| 25 | Alimony received | Still taxable here for post-2018 divorces, and still deductible to the payer |
| 26 | Other income | Prizes, awards, out-of-state lottery winnings |
Not on the list, and therefore never taxed: Social Security and Railroad Retirement, unemployment, temporary disability and family leave benefits, workers’ compensation, military pensions, gifts and inheritances, life insurance proceeds, cancelled debt, qualifying scholarships, and the ANCHOR and Senior Freeze payments themselves.
The category rule. Line 27 is the sum of the positive lines. If a category nets to a loss, the instructions say to make no entry on that line. The loss does not reduce wages, does not reduce interest, and does not carry to next year. A $20,000 stock loss in a year with $90,000 of wages is simply gone. The one exception is the Alternative Business Calculation on Schedule NJ-BUS-2, which lets a loss in one business category (Schedule C, rental, partnership, S corporation) offset income in another business category at 50% and carry forward for 20 years; for 2026 that adjustment is cut to 25% for gross income over $500,000 and to zero at $1,000,000.
Wages are bigger here. Line 15 comes from Box 16 of the W-2, and Box 16 is often larger than Box 1. Federal law lets an employee defer wages into a 401(k), a 403(b), a 457 plan, a SEP or SIMPLE, a health savings account and a flexible spending account. New Jersey excludes only the 401(k) deferral. Contributions to a 403(b), 457, Thrift Savings Plan, SEP or SIMPLE are taxable wages the year they are made, and so are IRA contributions, which get no deduction. The consolation is that those contributions come back untaxed when the plan pays out, a point that matters a great deal to retirees and is covered in New Jersey for retirees.
What comes off: exclusions, exemptions, deductions
Retirement exclusions, Lines 28a and 28b. Filers 62 or older (or disabled under Social Security rules) with total income of $100,000 or less exclude up to $100,000 joint, $75,000 single or head of household, $50,000 separate, of the pension and IRA income on Line 20a. From $100,001 to $125,000 the exclusion is 50% of Line 20a joint (37.5% single, 25% separate); from $125,001 to $150,000 it is 25% (18.75%, 12.5%); at $150,001 it is zero. Line 27 minus the exclusions is New Jersey gross income on Line 29, the number that drives the filing threshold, the medical floor, the college deductions and the ANCHOR income test.
Exemptions, Line 30. There is no standard deduction. Instead: $1,000 for the taxpayer, $1,000 for a spouse or civil union partner on a joint return, $1,000 more for each person 65 or older, $1,000 more for each person blind or disabled, $6,000 for each honorably discharged veteran, $1,500 for each dependent, and $1,000 more for each dependent under 22 attending college full time. The Department confirmed these amounts for 2026 in its estimated tax instructions; they are not indexed and have not changed in years. A married couple with two children claims $5,000. A retired couple both over 65 claims $4,000.
Deductions. The list is short and every item is New Jersey’s own.
| Deduction | Limit | Note |
|---|---|---|
| Medical expenses (Worksheet F) | Amount over 2% of gross income | Plus self-employed health insurance and Archer MSA deposits; no itemizing needed |
| Alimony and separate maintenance paid | Court-ordered amount | Deductible for all divorces, including those after 2018 |
| Property tax on a principal residence, or 18% of rent | $15,000 | Or a $50 refundable credit instead, whichever is better |
| NJBEST 529 contributions | $10,000 | Gross income $200,000 or less; other states’ plans get nothing |
| Tuition paid to a New Jersey college | $10,000 | Gross income $200,000 or less |
| NJCLASS student loan principal and interest | $2,500 | Gross income $200,000 or less |
| Organ or bone marrow donor expenses | $10,000 | Unreimbursed costs |
| Alternative Business Calculation Adjustment (NJ-BUS-2) | 50% of net business losses; less above $500,000 | Business categories only |
Not deductible, no matter what the federal return did: the standard deduction, mortgage interest, charitable gifts, state income tax, IRA and HSA contributions, student loan interest other than NJCLASS, moving expenses, employee business expenses, and the qualified business income deduction.
The property tax deduction is the one most households take. Homeowners deduct the property tax paid on their principal residence during the year, up to $15,000; renters treat 18% of rent as property tax. The alternative is a flat, refundable $50 credit, and Worksheet H compares the two; even at the 1.75% bracket a $9,000 deduction is worth $158. The medical deduction has a 2% floor rather than the federal 7.5% and needs no itemizing, so a family with $8,000 of medical bills on $90,000 of income deducts $6,200 here and probably nothing federally.
The rates
Gross income minus exemptions and deductions is New Jersey taxable income. The tax on it is graduated. Single filers and married filing separately use one schedule; joint filers, heads of household and qualifying widow(er)s use a wider one. The brackets are not indexed and have not moved since 2020, when the 10.75% rate was extended down to $1,000,000.
| Rate | Single, separate | Joint, head of household, qualifying widow(er) |
|---|---|---|
| 1.4% | $0 – $20,000 | $0 – $20,000 |
| 1.75% | $20,000 – $35,000 | $20,000 – $50,000 |
| 2.45% | — | $50,000 – $70,000 |
| 3.5% | $35,000 – $40,000 | $70,000 – $80,000 |
| 5.525% | $40,000 – $75,000 | $80,000 – $150,000 |
| 6.37% | $75,000 – $500,000 | $150,000 – $500,000 |
| 8.97% | $500,000 – $1,000,000 | $500,000 – $1,000,000 |
| 10.75% | over $1,000,000 | over $1,000,000 |
From the Department’s 2026 NJ-1040-ES instructions. A head of household gets the joint schedule, which is a real advantage for a single parent: $60,000 of taxable income is taxed at $1,050 on the joint schedule and $1,823 on the single one.
Every kind of income in the categories is taxed at these rates. Long-term capital gains, qualified dividends and lottery prizes over $10,000 get no preferred rate. Gain on the sale of a principal residence is excluded up to $250,000 single or $500,000 joint, because that is one of the federal rules New Jersey does adopt. There are no local income taxes; the Newark and Jersey City payroll taxes are paid by employers and never appear on a worker’s return.
The credits
Credits come after the tax. Several of New Jersey’s are refundable, meaning they are paid out even when they exceed the tax.
| Credit | Amount | Who |
|---|---|---|
| Credit for taxes paid to other jurisdictions (Schedule NJ-COJ) | Tax paid to another state or to Philadelphia, limited to the New Jersey tax on the same income | Residents; not for Pennsylvania wages |
| Child and dependent care credit | 50% of the federal credit at taxable income to $30,000, stepping down to 10% at $120,001–$150,000 | Refundable; no cap |
| New Jersey Child Tax Credit | $1,250 per child 5 or younger at taxable income to $30,000, down to $250 at $60,001–$80,000 (2026–2028) | Refundable; not for married filing separately |
| New Jersey Earned Income Tax Credit | 40% of the federal credit | Refundable; workers 18 and older qualify without children |
| Property tax credit | $50 | Refundable; instead of the deduction |
| Pass-Through Business Alternative Income Tax credit | Owner’s share of BAIT paid by a partnership or S corporation | Refundable |
| Excess UI/DI/FLI withholding (Form NJ-2450) | Amount over the annual maximum | Two or more employers |
The family credits are covered in Credits and breaks for New Jersey families. One oddity worth knowing now: the income tests for the child credit and the dependent care credit use New Jersey taxable income, after exemptions and the property tax deduction, so a renter’s 18% deduction can drop a family into a richer tier.
The NJ-1040 also carries a charge that is not a tax: the Shared Responsibility Payment on Schedule NJ-HCC for residents who went without health coverage, which the state kept after the federal penalty ended. For 2026 it runs from $695 for one uncovered adult up to a cap tied to the average bronze premium (verify). Get Covered New Jersey is the state marketplace.
Worked example: a family of four
Married, both under 65, two children ages 8 and 14. Wages of $88,000 in Box 16 after $5,000 of 401(k) deferrals. Interest and dividends of $2,000. Property tax of $9,000 on the house. No medical bills over the 2% floor. New Jersey withholding of $2,600.
| Wages (Line 15) | $88,000 |
| Interest and dividends (Lines 16a, 17) | $2,000 |
| Total income and gross income (Lines 27, 29) | $90,000 |
| Exemptions: 2 × $1,000 + 2 × $1,500 | −$5,000 |
| Property tax deduction | −$9,000 |
| New Jersey taxable income | $76,000 |
| Tax: $20,000 at 1.4% | $280 |
| $30,000 at 1.75% | $525 |
| $20,000 at 2.45% | $490 |
| $6,000 at 3.5% | $210 |
| New Jersey tax | $1,505 |
| Withholding | −$2,600 |
| Refund | $1,095 |
The federal standard deduction played no part. Had the family taken the $50 credit instead of the deduction, taxable income would be $85,000, the tax $1,921 and the net $1,871, so the deduction saved $366. Had one spouse put $5,000 into a 403(b) instead of a 401(k), wages would be $93,000 and the tax $1,700.
How it gets paid in
Withholding. Employers withhold from Form NJ-W4, which asks for filing status, allowances and, for two-earner couples, a wage-chart letter from A to E that keeps the second income from being withheld at too low a bracket. Pension payers withhold only if asked, on Form NJ-W-4P. Lottery payouts over $10,000 are withheld at 5% (8% over $500,000) and other gambling at 3%.
Estimated payments. Anyone who expects to owe more than $400 after withholding and credits must pay estimates on Form NJ-1040-ES or online, due April 15, June 15 and September 15, 2026 and January 15, 2027. New Jersey’s safe harbor is lower than the federal one: pay in the lesser of 80% of this year’s tax or 100% of last year’s in equal installments and no interest is charged. Filers with gross income over $150,000 ($75,000 separate) use 110% of last year’s tax. The January payment can be skipped by filing and paying in full by February 15, 2027. Underpayment interest is figured on Form NJ-2210.
Filing. The return is due April 15, 2027. The Department’s free NJ Online Filing handles the resident NJ-1040; IRS Direct File is no longer available in New Jersey since the IRS ended the program. The six-month extension to October 15, 2027 has a condition that catches people every year: at least 80% of the final tax (Line 45) must have been paid by April 15 through withholding, estimates or a payment with Form NJ-630. If it was not, the extension is void and the late-filing penalty runs from April 15. Interest runs on any unpaid balance regardless.
What trips people up
- Wages copied from Box 1 instead of Box 16, leaving a 403(b) or 457 contribution out of New Jersey income.
- A capital loss or rental loss carried over from the federal return. New Jersey has no carryovers.
- A federal 1099-R entered gross when part of the distribution is a return of contributions New Jersey already taxed.
- The federal tips, overtime or senior deduction expected to reduce New Jersey tax. It never reaches the return.
- The property tax deduction skipped by a renter who did not know 18% of rent counts.
- Medical expenses left off because they did not clear the federal 7.5% floor. The New Jersey floor is 2%.
- A 529 contribution to another state’s plan claimed as if it were NJBEST.
- An extension filed without 80% of the tax paid. The extension is void.
- Estimates paid to the federal 90% safe harbor when New Jersey needed 80% of this year or 100% of last year.
Behind the scenes
New Jersey adopted its income tax in 1976, late among the states, after the state supreme court ordered the legislature to fund schools and the legislature chose a tax whose proceeds would be constitutionally dedicated to property tax relief. The drafters did not copy the federal return. They wrote a “gross income tax” with its own categories, so that the state would not inherit every federal deduction Congress passed, and they set two rates, 2% and 2.5%. The categories survive; the rates do not. The top rate reached 10.75% in 2018 on income over $5,000,000 and was extended to $1,000,000 in 2020.
The category design is why the 2025 federal law changed nothing here. States that start from federal AGI or taxable income had to decide whether to “decouple” from the new deductions. New Jersey had nothing to decouple from. The Department’s guidance simply noted that the deductions do not affect the NJ-1040, and the legislature spent its 2026 session on the property tax programs and the child credit instead; see What’s new in New Jersey for 2026.
What to bring
- Every W-2, with attention to Box 16; every 1099-INT, 1099-DIV, 1099-R and 1099-G
- Brokerage statements showing U.S. Treasury and New Jersey municipal interest separately
- Dates of birth for everyone on the return; 65 adds $1,000, a full-time college student under 22 adds $1,000
- Proof of honorable discharge for the $6,000 veteran exemption, if not already on file with the Department
- Property tax paid on your home during 2026, or total rent paid and the landlord’s name and address
- Medical bills and health insurance premiums paid out of pocket
- NJBEST contributions, New Jersey tuition paid, NJCLASS loan payments
- Records of IRA, 403(b) and 457 contributions in past years, so withdrawals are not taxed twice
- New Jersey estimated payments made, with dates
- Form 1095 or other proof of health coverage for everyone in the household
- If you worked in another state or Philadelphia: that return and the W-2 showing the tax withheld
Questions people ask
Why is my New Jersey wage figure higher than my federal one?
Because New Jersey excludes only 401(k) deferrals from wages. Contributions to a 403(b), 457, Thrift Savings Plan, SEP or SIMPLE, and usually to a health savings account, are taxed by New Jersey in the year made. Box 16 is the right number for Line 15. Those contributions come back tax-free when withdrawn.
Does New Jersey have a standard deduction?
No. The $1,000 personal exemptions and $1,500 dependent exemptions are the only general allowance. The property tax deduction, the medical deduction and a few others are the only deductions.
I lost $15,000 in the market this year. Does that help on my New Jersey return?
Only against gains in the same year. Losses in the “disposition of property” category offset gains in that category and nothing else, and an unused loss does not carry forward. If you had no gains, the loss does nothing.
I don’t owe federal tax on my overtime anymore. Why do I owe New Jersey?
The federal overtime deduction comes off federal income after adjusted gross income. New Jersey never uses that number. Overtime is wages on Line 15 and is taxed in full. The same is true of tips and the $6,000 senior deduction.
Is it better to take the property tax deduction or the $50 credit?
The deduction, unless your tax bill is very small or your taxable income is near zero. A $9,000 property tax bill deducted at 1.75% saves $158; at 5.525% it saves $497. The credit is $50. Worksheet H does the comparison.
Does New Jersey tax my capital gains at a lower rate?
No. Gains are taxed at the same graduated rates as wages. The exclusion for gain on your principal residence, $250,000 single or $500,000 joint, does apply.
Build the number New Jersey’s way
Add the categories, leave the losses where they fall, take the exemptions and the property tax deduction, and remember that nothing from the federal return below the AGI line ever arrives here.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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Forms and official pages named in this article
- Form NJ-1040 instructions (2025), the resident return line by line
- Form NJ-1040-ES instructions (2026), rate schedules, exemptions and estimated tax
- Property tax deduction or credit, Worksheets G and H, Form NJ-1040-HW
- Retirement income exclusions, Lines 28a and 28b
- NJBEST, tuition and NJCLASS deductions
- Estimated payments, Form NJ-1040-ES, NJ-W4 and NJ-W-4P
Sources and where to check
- NJ Division of Taxation: 2026 NJ-1040-ES instructions (2026 rate schedules and exemptions)
- NJ Division of Taxation: 2025 NJ-1040 instructions
- NJ Division of Taxation: Wages (which retirement contributions are excluded)
- NJ Division of Taxation: Exempt (nontaxable) income
- NJ Division of Taxation: 2025 tax update (federal act has no effect on the NJ-1040; extension 80% rule)
- NJ Division of Taxation: Estimated tax safe harbor, N.J.S.A. 54A:9-6
- NJ Division of Taxation: Lottery and gambling winnings
- NJ Division of Taxation: Important income tax changes for 2025 (Direct File ended; NJ Online Filing)