New Jersey’s gross income tax system is unique because (1) it allows few deductions (that’s what they mean by “gross income”) and (2) income is separated into different categories or baskets (such as partnership income, interest income, etc.). Allowable deductions in one basket cannot offset income in another basket. This system can create mismatches with a taxpayer’s federal income tax liability and traps for the unwary.

Danny “Tiger” Schulmann is a successful karate practitioner, instructor and franchiser of karate schools, with over 40 schools in the New York metropolitan area, but he was recently KO’d by New Jersey’s Division of Taxation due to such a mismatch between his income and deductions.