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Important Note: This is highly a contentious issue with the state and federal courts involved. My advice here is subject to change as the cases work through the courts. So, at the time you get your taxes prepared, be sure to get up to date with those cases. I still maintain that using New York’s own rules in place for decades, the non-resident workers, now forced to work in their home state, do not have taxable earnings in NY.
Most times, when you work in a different state from the one you live in, you pay income taxes to that state as a non-resident. Also, during normal times, even if you work from home all year and never travel to your out of state office, your income is still taxable in that non-resident state if your company has a physical office you could have worked in.
An important note here though. There are some states that have reciprocity agreements, such as NJ and PA. This means that a NJ resident working in PA, does NOT have to pay non-resident tax to PA and vice versa. If this is your situation, then this memo does not apply to you. But please check with your tax preparer to make sure you understand your specific situation.
The rest of this memo assumes that you do have to pay non-resident state taxes when you are working out of state.
We also calculate your home state income taxes on your income earned out of state. But wait, you might say, doesn’t that mean I am paying taxes twice on the same income?
That is a great question, but the answer is no because when we do your taxes at the end of the year, we take a credit for taxes you paid to the non-resident state on your resident state income tax return. This avoids double taxation.
During the lockdown, many of us are working from home, and are no longer commuting out of state to work.
Why is this important? In the majority of cases, because you have been told to work from home and that you can’t work at your out of state office location, you no longer need to pay income taxes to that non-resident state.
But, many of you in this situation are still having your non-resident state tax withheld, when you really should be having your resident state tax withheld.
I am going to give an example of a NJ resident who traditionally worked in NYC.
Let’s go over this chart. The first section is before the lockdowns. Your wages are taxable in NY even though you live in NJ. We can see that NY taxes are being withheld from the paycheck. I made it a simple break even of $10,000 total NY taxes and $10,000 withheld so there is no overpayment or balance due on the tax return.
We see then that there is NJ tax calculated of $7,500, but we get a credit for the taxes paid to NY. As that NY tax is greater than the NJ tax, it completely wipes out the NJ tax so there is no overpayment or balance due on the tax return. Note that we only get that resident tax credit up to the amount of resident tax.
Now let’s look at the situation post lockdown with people working from home in their home state. We no longer have taxable wages in NY so taxes are zero. But, NY taxes are still being withheld. This gives us that overpayment or refund of $10,000.
Our wages are taxable in NJ, our resident state, but we don’t have any tax credits to take from NY so we have a large balance due of NJ tax, or $7,500.00.
This might trouble some of you, but the most important lines to look at are Total Taxes Paid. At the end of the day, you are only paying NJ taxes, which are lower than NY on average. So if you were a full year working at home, your total taxes would be $2,500 lower, or $10,000 less $7,500.
Again, many of you may still be having the NY taxes withheld and your tax preparer may prepare your returns as they have in the past, showing all the wages as taxable in NY and taking that credit on your NJ return.
But now you can see, you might be paying much more tax than you have to.
My firm is perfectly suited to help you allocate your wages between the states correctly.
Some of you will have a partial year of this situation. Let’s say you commuted to work in NY normally at the start of the year, and then started working from home on April 1. You would have to allocate ¾ of the year to NJ wages and remove them from your NY tax calculation.
Sounds like this person needs a good CPA to help them! I know a good one.
Of course, we are here to make sense of all of this and to make sure you pay as little tax as legally possible.
Today, no one can afford to pay any more in tax than they have to.
Make sure you minimize your taxes this tax season.
Questions? Concerns? Call me on (732) 673-0510.
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Tax Laws are complex.
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Remember,
“If We Aren’t Working For You, Then You Aren’t Working At Your Best”
Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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