Can I Take the NJ Standard Deduction and Still Itemize My Return?

New Jersey has its own tax rules that differ from federal regulations, which can create confusion for taxpayers. A common question is whether you can take the state’s standard deduction while itemizing on your federal return. Understanding New Jersey’s approach to deductions is key to maximizing tax benefits.

Unlike the IRS system, New Jersey follows a different structure, meaning federal choices don’t automatically apply to the state return.

Standard Deduction Eligibility Criteria

New Jersey does not offer a standard deduction for individual income tax filers. Instead, all filers must itemize based on specific allowable expenses.

The state allows deductions for medical expenses exceeding 2% of gross income, property tax payments up to a set limit, and contributions to certain retirement accounts. Personal exemptions vary based on filing status and dependents.

Certain work-related expenses, such as union dues and unreimbursed employee costs, are deductible if they exceed a percentage of income. Contributions to New Jersey’s 529 college savings plan (NJBEST) can also be deducted, up to $10,000 per year for single filers and $20,000 for joint filers. Documentation is required for all deductions.

Differences from Federal Return

New Jersey’s tax system imposes stricter limitations than federal rules.

A key difference is how the state treats pre-tax retirement contributions. Federally, contributions to 401(k) and traditional IRA accounts reduce taxable income, but New Jersey does not allow this for 401(k) plans. However, when withdrawing funds in retirement, the portion previously taxed at the state level is not taxed again.

Capital gains are also handled differently. The IRS applies lower tax rates to long-term capital gains, but New Jersey taxes all capital gains as ordinary income. Gains from stock sales or real estate transactions are subject to the state’s progressive income tax rates, which range from 1.4% to 10.75% in 2024.

Itemizing in New Jersey

New Jersey taxpayers must track eligible expenses throughout the year. Unlike the federal system, where mortgage interest is broadly deductible, New Jersey limits this deduction to home acquisition debt interest on a primary residence if the loan was taken before a certain date.

Medical expenses have a lower deduction threshold in New Jersey than at the federal level. While the IRS allows deductions for medical costs exceeding 7.5% of adjusted gross income (AGI), New Jersey sets the threshold at 2% of gross income. Only unreimbursed medical costs qualify, excluding elective or cosmetic procedures. Keeping detailed records of out-of-pocket healthcare spending, including prescriptions and doctor visits, is essential.

Educational costs can also impact state tax liability. While New Jersey does not offer a general tuition deduction, contributions to the NJBEST 529 College Savings Plan can reduce taxable income, capped at $10,000 per year for single filers and $20,000 for joint filers.

Filing Status Considerations

Filing status affects taxable income, deductions, and overall tax liability. While New Jersey generally follows federal classifications—Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse—there are differences in tax brackets and exemptions.

Married couples filing separately often face a higher combined tax burden due to stricter limitations. Separate filers cannot claim each other’s dependents, which impacts exemptions and tax credits. However, in cases where one spouse has substantial medical expenses or unreimbursed business costs, filing separately may still be beneficial despite higher tax rates.

For most married couples, filing jointly provides access to lower tax rates on combined income. Those with significant deductible expenses should compare both options to determine the best approach.