Understanding the Other State Credit for NY Non-Residents Filing in NJ
When individuals earn income in one state but reside in another, they may be subject to taxation in both states. To mitigate double taxation, many states offer a tax credit known as the Other State Credit (OSC). This article focuses on how New Jersey (NJ) residents can claim the Other State Credit when they have taxable income in New York (NY) as non-residents.
What Is the Other State Credit?
The Other State Credit allows taxpayers to offset their NJ income tax liability with taxes paid to another state on the same income. For NJ residents who work in NY, this credit helps prevent double taxation on earnings taxed by both states.
Who Qualifies for the Other State Credit?
To be eligible for the OSC in NJ:
You must be a full-year resident of NJ.
You must have earned income in NY and paid NY state income taxes as a non-resident.
The income must be subject to tax in both NY and NJ.
You must file a New Jersey resident return (Form NJ-1040) and a New York non-resident return (Form IT-203).
How to Claim the Other State Credit in NJ
To apply state or local taxes paid to New York to a New Jersey tax return, add the NJ COJ (NY) form and enter the taxes paid to the other state on Line 9a.
2. Locate the state and local taxes paid to New York (NY) on the taxpayer's state tax documents. This amount will be used as a credit for taxes paid to another state when preparing the New Jersey (NJ) state tax return.
3. NEXT, Click NJ COJ (NY)
4. Enter the state or local taxes paid to New York from NY Form IT-196, Page 3 on Line 9a at the NJ COJ (Credit for Taxes Paid to NY) form in the New Jersey state tax return.
Key Considerations
Local Taxes: NJ does not grant credits for NY City or Yonkers taxes.
Income Type: Only earned income (such as wages) and certain investment income qualify.
Tax Rate Differences: If NY’s tax rate is higher than NJ’s, you may not receive a full offset.
Reciprocity: NY and NJ do not have a reciprocity agreement, meaning NJ residents working in NY must file both state tax returns.
Conclusion
The Other State Credit is a crucial tool for NJ residents working in NY to avoid double taxation. By properly filing tax returns in both states and following the NJ-1040 guidelines, taxpayers can ensure they receive the maximum allowable credit. Always keep copies of tax documents and consider consulting a tax professional for complex situations.
For the latest updates on tax regulations and forms, visit the New Jersey Division of Taxation and New York State Department of Taxation and Finance websites.