The client is single with no dependents. He was just barely able to itemize for 2007 because of NJ state income tax and SUI/SDI contributions.
I made the assumption, based on his 2007 Form W-2, that he would be contributing $5,000 to a 401(k) plan and at least $2,000 for health insurance through a Section 125 plan.
I determined that he would be paying about $2,000 more in total state income tax by working in New York instead of New Jersey.
New York allows more deductions. There is a $7,500 “standard deduction” on the NY IT-203 return, while only $1,000 is allowed on the NJ-1040. In addition, New York treats contributions to a Section 125 plan as “pre-tax”, like the federal return, but New Jersey does not (although contributions for medical expenses are deductible to the extent total medical expenses exceed 2% of NJ Gross Income).
However the New York tax rate is higher. In this situation the top rate will be 6.85% for New York vs. 6.37% for New Jersey - and the higher NY rate is applied to more income. If a taxpayer’s federal AGI, after NY adjustments, is more than $100,000 the top 6.85% rate applies to more income.
For 2008 the maximum amount of New Jersey SUI and SDI contributions is $256. The maximum amount of New York SDI that is withheld is $31-32.
The client would file a non-resident IT-203 and pay tax to New York State based on his NY state taxable wages, with Section 125 contributions treated as “pre-tax”. He would report the NY wages on the NJ return, adding back the Section 125 contributions, and determine the tax liability based on his total taxable income from all sources. He would then claim a credit for the proportionate amount of the NJ tax liability that applies to the wages that were also taxed by New York. Even if the NY salary was his only taxable income he would have a small balance due to NJ because of the Section 125 add-back.
Since the client will be able to itemize and deduct state income tax withheld, “Sam” will reimburse him for part of the additional $2,000 – up to $500 or more (the client is in the 28% bracket for federal taxes). This will help to reduce the effective tax cost of working in NYS. Of course this is as long as the client is not a victim of the dreaded Alternative Minimum Tax, which he was not for 2007.
I mentioned to the client that there may be increased costs for commuting, and for eating lunch in NYC. He told me that the $110 cost of the monthly bus pass to NYC would be equal if not less to what he was spending in gas and maintenance on his car – plus the bus stops in front of his apartment complex. And he will be brown-bagging it.
My final comment was to consider that working in NYC might add at least an hour to his daily commuting time.