Presence in Two States

In the northeast, with the states being smaller than in much of the rest of the country, it is hardly unusual to work and live in different states. Certainly, in the New Jersey – New York area, it is likely all of us know people who live near us in one state and work in another state.

It is inevitable that spanning two states creates certain tax complexities. Fortunately, these complexities have become so relatively common that, at least for tax professionals, they are no longer complex. What it comes down to is that, using a fairly common example of someone living in New Jersey and working in New York, that person needs to file state income tax returns for both states. For the most part, that does not mean paying more taxes – only that the taxes you pay will be split between the two states. The state in which you work – in this hypothetical New York – has first claim on the earnings that you had in that state. It has no claim on any of your other income – since you are not a resident of New York, it can only tax you on income that is New York derived. 

You also file a New Jersey tax return, in which you report all of your income on that return, including what you earned in New York. Your New Jersey tax is then calculated on your total income basis. However, to avoid double taxing the same income, New Jersey then provides you with a credit against New Jersey taxes for what you paid to New York. Note that this is typically not a perfect offset. You can expect that New Jersey will not give you a complete offset for the New York taxes – but it will be fairly close.

In New Jersey we have an interesting situation with our neighbor to the west – Pennsylvania. New Jersey and Pennsylvania have an income tax reciprocity system. What that means is that a New Jersey resident working in Pennsylvania does not get taxed on that income in Pennsylvania but rather in New Jersey. The Pennsylvania employer will withhold New Jersey taxes. In a similar vein, and perhaps more common, a Pennsylvania resident working in New Jersey does not get taxed in New Jersey for that earned income, but rather in Pennsylvania. The New Jersey employer will withhold Pennsylvania taxes. Such reciprocity does not exist between New Jersey and New York.