I have heard of "double tax" for people living in NJ and working in NY, but can't seem to determine whether it is the truth or a tax myth. Thanks for any light you can shed on this subject. I hope this fits into the criteria of the type of question you will answer.
A. A good question, Erin. And one that applies to many NJ taxpayers.
First, if you must live in New Jersey at least you have chosen a nice, albeit expensive, place to live. I worked for many years in nearby Summit. One suggestion – go to Route 22 to buy gas for your car.
The basic answer is that you will not be “double-taxed”. You will receive a credit on the NJ return for the state income tax you pay to NY on your husband’s wages. However, as with anything involving taxes, it ain’t quite that simple.
If you live in one state (New Jersey) and work in another (New York) you must first pay state income tax to the state in which you work (New York) on the wages earned in that state. The non-resident state (New York) will not directly (see below) tax you on your other income (i.e. NJ wages and self-employment earnings, interest, dividends, capital gains, etc.).
The state where you live (New Jersey) will tax you on all of your taxable income from all sources, including wages earned in another state (New York). Your resident state (New Jersey) will allow you to claim a credit for any non-resident state income tax paid to another state (New York) on income taxed by both states.
Your husband will have New York state income tax withheld from his wages. He will probably not have New Jersey state income tax withheld.
He will have to file a New York State Form IT-203 – Nonresident and Part Year Resident Income Tax Return. The way this works is that first you calculate the NY state income tax liability as if you were a full-year NY resident – reporting all income for the year that is taxable to a NY resident and claiming all deductions for the year allowed for a NY resident. You then divide your New York State Adjusted Gross Income from New York State sources (in this case the wages earned from your husband’s employment in NY) by your New York State Adjusted Gross Income from all sources (as if you were a full-year resident) – and multiply the result by the NY state income tax liability you had initially calculated as if you were a full-year resident.
Sound confusing? Here is an example:
Let us say your federal AGI for 2007 is $150,000 and your husband’s W-2 from his New York State based employer indicates $50,000 in NY wages. For simplicity sake you have no federal “adjustments to income” and no New York additions (i.e. non-NY municipal interest) or subtractions (i.e. taxable state income tax refunds, interest from US government obligations like Series EE savings bonds, taxable Social Security benefits, and certain retirement income). Your allowable New York State itemized deductions total $24,999 (not the same as your total allowable federal itemized deductions). You do not have any dependents (NY does not allow a “personal exemption” deduction for you or your husband – only for dependents). So your NY taxable income, figured on all of your 2007 income as if you were a full-year resident, is $125,001. You NY tax would be around $7,725.
Your NY total AGI is $150,000. Your NY source AGI is $50,000. So your 2007 NY state income tax liability would be $2,575 ($50,000/$150,000 x $7725).
On the NJ-1040 resident return you would figure your NJ Gross Income Tax liability on all your 2007 income, from all taxable sources. Let us say this comes out to $4,860. You would then divide your NY source income, say $50,000, by your New Jersey Gross Income, say $150,000, and multiply this by the $4,860. This would give you a credit of $1,620 ($50,000/$150,000 x $4860) for the $2,575 in state income tax paid to NY. So your 2007 NJ Gross Income Tax liability would be $3,240 ($4860 less the $1620 credit).
You will note that you paid $2,575 in state tax to New York, but got a credit of only $1,620 on the NJ-1040. This is because the NY tax rate, 6.85%, is higher than the 5.525% NJ rate.
You will also note that your initial NJ Gross Income Tax liability – like the initial NY tax liability - is based on all your income from all sources – including the salary taxed by NY. If a large portion of the total income taxed by NJ represents earnings also taxed by NY it is very possible that you will have a balance due on your NJ-1040 despite the credit, which could be substantial enough to require quarterly NJ estimated tax payments to avoid underpayment penalties.
Another area of concern is the fact that the NJ state tax is a “gross” tax, while NY for the most part follows the federal 1040. Certain deductions allowed to reduce NY source Adjusted Gross Income are not deductible against NJ Gross Income. For example, if you are making deductible IRA contributions you can allocate a portion of the contributions to your NY source earned income and claim an adjustment on the IT-203. NJ does not allow a deduction for IRA contributions. Also, NJ does not treat contributions to a Section 125 medical “flexible spending account” as “pre-tax”, while NY does. So the amount of NY source income taxed by NY may be less than the amount of your husband’s NY wages that is taxed by NJ.
If the $50,000 NY source wages from the above example represents $53,000 in gross salary and $3,000 in federal and NY “pre-tax” FSA contributions, than $53,000 will be taxed by NJ and you will only be allowed to use $50,000 as “income actually taxed by other jurisdiction” in the calculation of the credit.
Or if you are permitted a $5,000 deductible IRA contribution on your federal 1040, you can claim a % of this as an adjustment to income on the NY return. The amount taxed to NJ would be $50,000 (no “pre-tax” in this example), but the amount used in the credit calculation for income taxed by NY would be the $50,000 minus the allowable NY IRA deduction.
You will only be taxed by NY on wages actually earned while physically in the State of New York. If you spent 5 days at a work-related conference in Chicago and 2 days training at a branch office in Connecticut you do not owe NY tax on the allocated earnings for these 7 days. Because, as discussed above, the NY tax rate is higher than the NJ tax rate, it is very likely that you will pay less net state tax on money taxed by NJ. So you should keep track of any days that your husband works in a state other than New York. Be advised that days worked at home do not count as days outside of NY. If your husband works one day a week at home in NJ it is the same as if he went into the office in NYC.
It is not as easy as saying $25.00 per hour x 8 hours x 7 days = $1,400.00 earned outside of NY. There is a complicated formula that must be used to allocate the income.
By allocating some of your NY W-2 wages to NJ you will increase your NY refund, but you will also increase the balance due to NJ – such that you may be penalized for underpayment of estimated tax to such an extent that it wipes out the net state tax savings from the allocation.
Since you are working in NJ you should have the maximum amount of NJ Gross Income Tax withheld from your wages. If you are not already claiming “Married- but withheld at higher Single Rate–0”, or just “Single-0”, for NJ income tax withholding purposes you should be. You may also need to have an additional amount of NJ state income tax withheld. You can file a separate NJ-Form W-4, other than your federal Form W-4, so you can have a different withholding status for federal and NJ state taxes.
You should prepare a preliminary 2007 NJ-1040 and 2007 IT-203 in November to see where you stand with your Uncles Jon and Elliot and see if you should have additional NJ tax withheld or make a 4th quarter NJ estimated tax payment.
The fact that you work in two different states does not affect how you file your federal Form 1040. You should determine whether to file joint or separate federal returns in the same manner as you would if you both lived and worked in the same state. See my posts on “Joint or Separate? That is the Question” Part I and Part II. In your case, you would file the NJ and NY state income tax returns using the same filing status as you use for your federal income tax return.
As you can see from this long and perhaps confusing answer - multi-state issues are involved and complicated. Anyone in your situation should most definitely consult a tax professional.
I hope I have provided some help, and not made you even more confused. Let me know if you need me to clarify any of the items discussed above.