15 Aug I work in NYC but live in N.J. Do I have to pay taxes to both states?
Q. I work in New York City but live in New Jersey. Because of this, I am paying state income taxes to the state of New York and nothing to New Jersey. At the end of the year, I do receive a tax credit so it is pretty much a wash at the end of the day. I recently received a notice from New Jersey that I must make estimated quarterly payments, so this would mean I’m paying taxes to both states at the same time for the same income. Is that correct?
A. You’re correct that states will give you a credit so you’re not paying taxes twice on the same income.
But this request for estimated taxes may go beyond the income you earn from your job.
Let’s take a step back.
You have two mechanisms to pay your New Jersey personal income taxes: through withholding on your wages or by making quarterly estimated tax payments, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel
“No taxpayer is formally required to make estimated tax payments,” he said. “However, if your tax liability after payments exceeds $400, you could be subject to an underpayment of estimated tax penalty.”
If you do not have significant non-wage income and all of your wage income is taxed by New York, you should be receiving a New Jersey resident credit that substantially offsets your New Jersey tax, Becourtney said.
“It sounds as though you received a tax notice from the state, and on the notice the state listed the amount of estimated tax payments that you needed to have made to avoid incurring an underpayment penalty charge,” he said. “The credit for New York tax will not offset the tax attributable to non-wage income that is not taxed by New York, such as interest, dividends, capital gains, rental income, and income from pass-through entities, including partnerships and S corporations.”
Becourtney said the basic rule is that if you pay at least 80% of your tax during the year, you avoid an underpayment penalty.
“If you do not meet this threshold but your current year payments exceed your prior year tax liability, you will likewise generally avoid an underpayment penalty,” he said. “This is commonly referred to as the `safe harbor.’”
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This story was originally published on Aug. 15, 2022.
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