Avoiding double taxation is a key item CPAs should be discussing with their clients. New Jersey residents earning income in other states may qualify for a credit on their New Jersey tax return to avoid double taxation. The credit offsets taxes paid to other jurisdictions and is limited to the lesser of the taxes paid to the other state or the New Jersey tax due on the same income.

New Jersey taxes all income its residents earn, regardless of the source. Residents earning income in states like New York or Pennsylvania often face complex multi-state filings. Proper planning, accurate documentation and understanding reciprocal agreements can help reduce tax liabilities and ensure compliance. Filing Schedule NJ-COJ with supporting documents, such as tax returns and proof of payments, is necessary to correctly calculate and claim the credit.

Credit Calculations

To calculate the credit for taxes paid to other jurisdictions, it’s essential to understand the key components of the calculation and how to determine them for each jurisdiction and tax type. Specifically, the following must be determined:

• Income actually taxed by the other jurisdiction
• Income properly taxed by another jurisdiction
• Income actually taxed by both New Jersey and the other jurisdiction
• Income taxed by New Jersey
• Actual tax paid to the other jurisdiction

A jurisdiction is any state in the U.S. other than New Jersey, a political subdivision (e.g., county or municipality) of any state other than New Jersey, or the District of Columbia. A taxpayer cannot claim a credit for taxes paid to the U.S. government, Canada, Puerto Rico or any foreign country or territory.

Income From New York

New Jersey residents who work in New York or earn other taxable income are often taxed on an amount less than their actual New York source income due to the deductions allowed by New York. Only the income actually taxed by New York should be used when calculating a credit for taxes paid to New York.

Taxpayers must file Schedule NJ-COJ and include their New York tax return (Form IT-203) and proof of withholding, such as W-2 forms. While this credit prevents double taxation, it may not eliminate all liabilities since New York’s tax rates are often higher than New Jersey’s.

Income From Pennsylvania

In contrast, income earned in Pennsylvania falls under a reciprocal tax agreement, meaning New Jersey residents working in Pennsylvania only pay New Jersey taxes on their wages. To benefit, residents should submit Form NJ-165 to their Pennsylvania employers and verify correct New Jersey withholding.

Non-wage income, such as rental or business income, remains taxable in Pennsylvania, requiring a non-resident Pennsylvania return and potential credits on the New Jersey return.

The reciprocal agreement does not cover the Philadelphia Wage Tax. New Jersey residents working in Philadelphia must pay this tax but can claim a credit on their New Jersey return by filing Schedule NJ-COJ with documentation, such as W-2 forms.

Proper Planning

Multi-state taxation can significantly affect a taxpayer’s finances, but proactive planning can help minimize its impact. Accurately filing Form NJ-COJ ensures that individuals receive the full credit for taxes paid to other jurisdictions, preventing double taxation. Understanding reciprocal agreements, such as those between New Jersey and Pennsylvania, can simplify filings and avoid unnecessary withholdings.