Thursday, November 12, 2015
I was recently posed questions by the prolific “Anonymous” via a comment to a long-ago post. Since I know that comments, especially to older posts, are rarely, if ever, read, I will respond in a new post.
Here is the comment I received (actually 2 comments – which I have combined) –
“So my girlfriend and I are both currently working and living in NY, we each gross roughly 200k and we both max out our 403B contributions. We are currently shopping for a house and are considering properties both in NY (outside NYC) and NJ. We are wondering from an income tax standpoint which location would be better? I have heard that NJ does not recognize 403B as an annuity deferment, correct?
If I choose a property in NJ, will my property taxes be deductible from my NY state income taxes?
Thanks for your time Robert.”
Any decision on where to live – New York State (outside NYC) vs New Jersey – would require running specific income and deduction numbers, which I am obviously not going to do. However I can make some observations on the tax consequences of each choice.
1. If you live in New York City you will pay a resident income tax. I am talking about the 5 boroughs and not just Manhattan. If you move to NJ, or elsewhere in NY, you would not have to pay the NYC income tax. Non-residents who work in “the city” do not pay this tax.
2. As two single individuals at your level of income ($200K each) if you are residents of NY State all of your income will be taxed at a flat 6.65%. If you are a NJ resident working in NY you will determine your NYS tax as if you were a full-year resident and do a calculation to apportion the tax based on NY State source income (your wages).
4. As a NJ resident your total income will be taxed working your way "up the ladder" on a sliding scale from 1.4% to 6.37%, and you will receive a credit for the tax paid to NY State on your NY source wages and any other income. The credit is not dollar-for-dollar; it is determined using a special calculation formula. If your NY state tax liability was $10,000 you would not get a full $10,000 credit on the NJ state return.
5. If there are any days that you do not work physically in New York State – i.e. attending a conference or convention in Las Vegas – you can allocate the wages for those days to New Jersey so that a portion of your wages will not be NY State source income. Income taxed in New Jersey will usually cost slightly less in net state taxes than income taxed in New York.
6. New York State income tax allows for most itemized deductions you claim on your federal return – except for state and local income or sales tax. The allowable NYS itemized deduction is reduced for higher-income taxpayers. New Jersey residents can only deduct medical expenses in excess of 2% of NJ Gross Income and up to $10,000 in real estate taxes on the NJ-1040.
7. You are correct. New Jersey does not treat employee contributions to pension plans, other than a 401(k) plan, as “pre-tax”. So the wages subject to tax as a NJ resident will be higher than the wages subject to federal or NY State income taxes – substantially so because you both max-out your 403(b) contributions. New Jersey also does not treat any Section 125 employee health insurance or health FSA payments as “pre-tax”, as Sam and Andy do, so this may further increase the amount of wages subject to NJ state income tax. However these expenses can be included in the NJ medical expense deduction (subject to the 2% exclusion). And NJ also does not treat any transportation benefits at “pre-tax”.
If all of your taxable income comes from W-2 wages, or if what would be “non-NY source” income for a NY non-resident – interest, dividends, etc – is minimal, and any days worked outside of NY State are also minimal, I expect you would pay less net state income tax living in New York. This is because NY follows federal tax law when it comes to “pre-tax” treatment of employee benefit contributions, while NJ does not. You would probably pay less state income tax if you both lived and worked in NJ.
Of course state income taxes is not the only factor to consider when choosing where to live.
If you do decide to live in NJ I would see if your employer(s) would withhold NJ state income tax as well as NY state income tax, or consider making quarterly estimated tax payments to NJ.
As for property taxes paid to New Jersey – while you cannot take a direct deduction of NJ property taxes against NY State source income on a NY non-resident tax return, because property taxes are allowed as an itemized deduction on the federal and NY State tax returns you will receive some tax benefit for the real estate taxes paid to New Jersey on the NY non-resident return
I hope this answers the questions posed by Anonymous.
Does anyone have anything else to add?