Q . My husband and I recently moved to Millburn NJ. I will be working in NJ while he will work in NYC. We are unsure how NJ and NY state taxes are applied. Does he have to pay state taxes in both states? How does this affect our federal return - do we file jointly or individually? 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. Thanks, Erin 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% ,