On August 19, 2024, the New Jersey Division of Taxation adopted a new regulation, N.J.A.C. 18:35-5.3, addressing how nonresident stock option income should be treated for tax purposes. Alongside this regulation, the Division has also made technical adjustments to other personal income and partnership tax rules.
Stock Option Income for Nonresidents
Under this new regulation, nonresident individuals who receive compensation from stock options, stock appreciation rights, or restricted stock tied to work performed in New Jersey must report this income as New Jersey source income. This reporting aligns with the federal taxable year and method in which the income is included in the individual’s federal adjusted gross income.
The New Jersey gross income tax owed by nonresident taxpayers is based on an allocation formula to determine how much of the income is attributable to New Jersey. The allocation formula multiplies the gain realized from stock options or other applicable stock compensation by a fraction. The numerator of this fraction is the number of days the individual was employed in New Jersey, while the denominator is the total days worked both in and outside of the state during the period the stock options were earned. Importantly, days spent working from home in another state, such as New York, are not counted as New Jersey workdays. However, the regulation does not provide examples for periods when the “convenience of the employer” rule is in effect.
Additional Changes to New Jersey Tax Regulations
The Division has also amended N.J.A.C. 18:35-1.3, which affects the filing of Form NJ-1065 for partnerships. Effective August 19, 2024, when filing this form, taxpayers must now include a statement of income and expenses, balance sheet per books, and all referenced supporting schedules, along with the partner directory from the federal Form 1065.
Moreover, the Division made technical updates to N.J.A.C. 18:35-4.1 and N.J.A.C. 18:35-11.3, further refining personal income tax and partnership regulations in New Jersey.
These changes underscore New Jersey’s commitment to ensuring tax clarity and accuracy, particularly for nonresident individuals and partnerships with ties to the state.
For additional details and tax advice, please contact Martin D. Hauptman at (973) 243-7912 or via email at mhauptman@mblawfirm.com