Calculating the Credit for Taxes Paid to Philadelphia

 – July 25, 2017
Calculating the Credit for Taxes Paid to Philadelphia

The following information was provided by the New Jersey Division of Taxation in their Summer 2017 edition of New Jersey State Tax News:

If a taxpayer paid tax to Philadelphia on income earned there and that income also is subject to New Jersey tax in the same year, the taxpayer may be eligible for a credit for taxes paid to another jurisdiction on his/her New Jersey Income Tax return.

A common problem in calculating a credit for Philadelphia is that taxpayers often include income that was not taxed by both New Jersey and Philadelphia. For example, 401(k) retirement contributions are taxable for Philadelphia purposes but are not taxable for New Jersey purposes. Since income must be subject to tax by both jurisdictions, the amount of the 401(k) contributions must be deducted from the income earned in Philadelphia when calculating the credit.

To determine the proper amount of income to include when calculating the credit, the taxpayer must first divide the wage tax paid by the Philadelphia tax rate. The result is the amount of income actually taxed by Philadelphia. This amount cannot exceed the income reported on Line 14 of the NJ-1040. Individuals who worked only in Philadelphia must then deduct the full 401(k) contribution amount. Individuals who worked both inside and outside Philadelphia must deduct the 401(k) contributions made while working in Philadelphia. Information about the Philadelphia wage tax rate is available on the Philadelphia Revenue Department’s website.

For additional information, see GIT-3W, Credit for Taxes Paid to Other Jurisdictions (Business/Non-wage Income) and GIT-3B, Credit for Taxes Paid to Other Jurisdictions (Wage Income).