Do New York and New Jersey Have Tax Reciprocity?
Navigate New York and New Jersey income taxes for cross-border commuters. Discover how to properly file and prevent double taxation.
Tax reciprocity agreements are arrangements between states that allow residents of one state to work in another state without having to pay state income taxes to both. These agreements simplify tax filing for commuters by requiring them to file taxes only in their state of residence, preventing the double taxation of income.
Absence of Reciprocity
New York and New Jersey do not have a tax reciprocity agreement. This means that income earned in one state by a resident of the other is subject to tax in both states. For example, a New Jersey resident working in New York will owe New York state income tax, and a New York resident working in New Jersey will owe New Jersey state income tax. Individuals who live in one state and commute to the other for work must file income tax returns in both states.
Credit for Taxes Paid to Another State
Despite the absence of a reciprocity agreement, mechanisms prevent the same income from being taxed twice. Both New York and New Jersey offer a tax credit for income taxes paid to the other state. This credit offsets the tax liability in the resident state for income already taxed by the non-resident state.
The credit prevents double taxation by ensuring the total tax paid on that income does not exceed the higher of the two states’ tax liabilities. This credit is not a dollar-for-dollar refund of the taxes paid to the non-resident state. The credit amount is limited to the lesser of the tax paid to the non-resident state or the amount of tax the resident state would have imposed on that same income. This limitation ensures the resident state does not credit more tax than it would have collected if the income had been earned within its borders.
Determining Residency Status
The application of tax laws, including credits for taxes paid to other states, depends on an individual’s residency status. Both New York and New Jersey define a resident based on two criteria: domicile and statutory residency. Domicile refers to an individual’s permanent home, the place they intend to return to whenever they are away. An individual can only have one domicile at a time.
Statutory residency is determined by physical presence and the maintenance of a permanent place of abode. In both New York and New Jersey, an individual may be considered a statutory resident if they maintain a permanent place of abode in the state and spend more than 183 days there during the tax year, even if their domicile is elsewhere. Any part of a day spent in the state counts as a full day. Meeting either the domicile or statutory residency test can classify an individual as a resident, subjecting their worldwide income to taxation in that state.
Tax Filing Implications
Individuals living in one state and working in the other will need to file two state income tax returns. This includes a non-resident tax return in the state where the income was earned and a resident tax return in their home state. For instance, a New Jersey resident working in New York will file a New York non-resident return (Form IT-203) and a New Jersey resident return (Form NJ-1040). A New York resident working in New Jersey will file a New Jersey non-resident return and a New York resident return.
It is recommended to complete the non-resident state tax return first. This allows for the accurate calculation of the income taxed by the non-resident state. The credit for taxes paid to the non-resident state is then claimed on the resident state’s tax return. The resident state’s tax form will have a specific section or schedule for claiming this credit, such as Schedule NJ-COJ.