How Do Taxes Work If I Work in NYC and Live in NJ?
Demystify the tax rules for NYC commuters residing in NJ, ensuring you understand your liabilities and leverage available credits.
Navigating tax obligations can be complex, especially for individuals who work in one state and reside in another. This situation often leads to questions about income sourcing, tax credits, and filing requirements in multiple jurisdictions. For those employed in New York City while living in New Jersey, understanding the interaction between these states’ tax laws is crucial for compliance. Both New York and New Jersey claim a share of income, requiring careful consideration of how earnings are reported and taxed. This guide clarifies the specific tax responsibilities in this common commuter scenario.
New York State and City Tax Obligations
Individuals who work in New York are subject to its income tax rules, regardless of residency. New York State imposes income tax on non-residents for income derived from New York sources, including wages, salaries, and other compensation for work performed within the state. Income from real property and certain business income also constitutes New York-sourced income for non-residents.
Non-residents earning income in New York must file Form IT-203, the Nonresident and Part-Year Resident Income Tax Return. The tax is computed by first determining the total tax as if the individual were a full-year resident and then allocating a portion of that tax based on the percentage of income sourced to New York.
New York City has its own tax structure. While residents pay a personal income tax, non-residents working in New York City are generally not subject to this tax. However, a specific “City Worker Nonresident Tax” may apply to individuals working for the City of New York who live outside its borders and were hired on or after January 4, 1973.
New Jersey Resident Tax Obligations
New Jersey residents are subject to income tax on their worldwide income, including earnings from sources outside New Jersey, such as wages from New York employment.
New Jersey residents, including full-year and part-year residents, file Form NJ-1040, the New Jersey Resident Income Tax Return, to report their income and calculate their tax liability. Even if a portion of their income was taxed by another state, New Jersey requires residents to include all income on this form.
The obligation to file Form NJ-1040 arises if a resident’s gross income exceeds specific thresholds, which vary based on filing status.
Avoiding Double Taxation
The concurrent taxing authority of both New York and New Jersey on the same income presents a potential for double taxation. An individual working in New York City and living in New Jersey would otherwise be taxed on their New York-sourced income by New York, and again by New Jersey as part of their worldwide income. This is addressed through a specific tax credit.
New Jersey provides a credit for income taxes paid to other jurisdictions. This credit allows New Jersey residents to reduce their New Jersey income tax liability by the amount of income tax paid to another state, such as New York, on income also taxed by New Jersey. This ensures taxpayers do not pay taxes twice on the same earnings.
The calculation of this credit is subject to limitations. The credit claimed on the New Jersey return cannot exceed the amount of New Jersey tax that would have been due on that income, or the actual tax paid to New York, whichever is less. The credit is claimed on Schedule A or Schedule NJ-COJ of the New Jersey resident income tax return (Form NJ-1040). Taxpayers should retain copies of their New York non-resident return and proof of payment, such as W-2 forms, for their records in case of an audit.
Managing Withholding and Estimated Taxes
Employers in New York are required to withhold New York State income tax from employee wages. For those working in New York City, withholding for New York City taxes may also occur, particularly for city employees. This helps individuals meet their New York tax obligations.
Despite New York withholding, individuals living in New Jersey may still face under-withholding for their total tax liability. This can occur if the New Jersey tax rate on their income is higher than New York’s, or if they have other income sources not subject to New York withholding. New York withholding may not fully cover the eventual New Jersey tax due, even after considering the credit for taxes paid to New York.
To avoid potential underpayment penalties, individuals may need to make estimated tax payments to New Jersey. Estimated taxes are necessary when insufficient tax is withheld from income or when income is received from sources not subject to withholding. To avoid penalties, pay at least 90% of the current year’s tax liability or 100% of the prior year’s tax through withholding and estimated payments, whichever is smaller. For higher-income taxpayers, this rule requires paying 110% of the prior year’s tax if their adjusted gross income exceeded a certain threshold. New Jersey provides Form NJ-1040-ES, Declaration of Estimated Tax, for these payments.