Living in New Jersey while working in New York is a common scenario, especially for residents of commuter-friendly towns like Jersey City, Hoboken, and Secaucus. However, the financial and tax implications of this arrangement can be daunting if you’re not prepared. 

You’ll need to file tax returns in both states, manage different tax laws, and possibly face additional taxes, such as the commuter tax for self-employed individuals. Fortunately, New Jersey residents can offset their tax liabilities with a crucial tax credit for taxes paid to New York, preventing double taxation. 

But that's just the beginning—remote work, unemployment income, and differences in W-2 reporting also come into play, creating potential pitfalls if you’re unaware of the rules.

Do You Need to File Taxes in Both NJ and NY?

Yes, if you live in New Jersey and work in New York, you are required to file tax returns in both states. Here's a breakdown of what you need to do:

  • New York State Non-Resident Tax Return (Form IT-203): This return covers income earned within New York State. Since your employer is based in New York, they are required to withhold New York state taxes from your paycheck.
  • New Jersey Resident Income Tax Return (Form NJ-1040): As a New Jersey resident, you must report your worldwide income on your NJ tax return, even though part of your income was earned in another state.

It may sound like you're being taxed twice, but New Jersey provides a tax credit to reduce your overall liability. This credit is designed to account for taxes paid to New York.

How to Avoid Double Taxation with Tax Credits?

New Jersey has a system in place to ensure that you’re not taxed twice on income earned in New York. The NJ Credit for Taxes Paid to Other Jurisdictions helps balance the taxes you owe between both states. Here's how it works:

  • You calculate the amount of tax paid to New York on income earned there.
  • New Jersey grants a tax credit for these payments, but it will not exceed the amount of tax you would have owed to New Jersey on that same income.

However, this process can be tricky. Incorrectly calculating the credit could result in either paying too much tax or facing an underpayment penalty. Many taxpayers choose to consult a professional tax preparer who specializes in multistate tax filings to ensure accuracy.

Understanding Commuter and Local Taxes

Commuters working in New York may be concerned about additional local taxes, but here’s the good news: most New Jersey residents are not subject to New York City or Yonkers local income taxes unless they work for certain NYC government agencies. If you fall into this category, you may be required to file an NYC-1127 return.

However, self-employed individuals who earn more than $50,000 annually may face another tax: the Metropolitan Commuter Transportation Mobility Tax (MCTMT). This tax is calculated based on net earnings and is levied at a rate of 0.34%. Unlike salaried employees, self-employed workers must pay this tax directly on a quarterly basis.

Working Remotely: What Are Your Tax Obligations?

Remote work has introduced new tax challenges for those living in New Jersey and working for New York-based employers. Under New York’s Convenience of the Employer Rule, if you work remotely for convenience rather than necessity, New York may still tax your income as if you were physically present in the state.

However, if your remote work is due to your employer's necessity—such as working in a specialized home office—New York may not tax that portion of your income. Here’s what you need to consider:

  • Remote Freelancers: If you are self-employed and perform your work entirely from your home in New Jersey, your income is considered New Jersey income, even if your clients are based in New York.
  • Hybrid Employees: For employees splitting time between New York and New Jersey, careful tracking of workdays is essential to properly allocate income and reduce tax liability.

Misreporting remote work days could lead to double taxation or audits, so make sure you accurately document where your work is performed.

Tax Implications of Unemployment Income

Unemployment benefits are another area where tax rules can get complicated. If you worked in New York but live in New Jersey, any unemployment income related to your New York job must be reported on your New York State tax return.

However, New Jersey does not tax unemployment compensation, so you do not need to include these benefits on your New Jersey return. It's important to understand these differences to ensure compliance and avoid errors during tax season.

Commuter Costs: Taxes vs. Living Expenses

For many commuters, taxes aren’t the only financial consideration. Commuting from New Jersey to New York City comes with additional costs, including:

  • Higher Property Taxes in NJ: New Jersey has one of the highest property tax rates in the country. While housing costs are generally lower than in NYC, property taxes can offset some of these savings.
  • Sales Tax Savings: New Jersey’s statewide sales tax rate is 6.625%, compared to 8.875% in New York City. Certain areas in NJ, like Urban Enterprise Zones, offer even lower sales tax rates, which can provide further savings.
  • Commuting Costs: Travel expenses can add up quickly, particularly if you rely on trains, buses, or drive into Manhattan, where congestion pricing could add an extra charge.

Finding the right balance between taxes and living expenses is key to maximizing your financial well-being as a cross-border commuter.

Tips to Simplify Filing Multistate Taxes

Filing taxes in both New Jersey and New York can feel overwhelming, but the process becomes easier with careful planning. Here are some tips to streamline the process:

File Your New York Return First
Begin with your non-resident New York tax return (Form IT-203). This form calculates your taxable income and the amount of tax owed to New York.

Report W-2 Income Correctly
Your W-2 may show the full amount of your wages under Box 16 for New York. However, when filing your NY return, you should only report the portion of income earned in New York, not the entire amount on your W-2.

On your New Jersey return, ensure that the income reported in Box 16 is adjusted to reflect the correct amount after taxes paid to New York are deducted.

Utilize Tax Software or a Professional
Multistate tax preparation software can help automate calculations, but be cautious—many programs may not fully account for the complexities of NJ and NY tax laws. Consulting with a CPA familiar with cross-border taxes can prevent errors and maximize your tax savings.

Keep Detailed Records
For remote or hybrid workers, maintain a record of where and when you worked. This documentation can support your tax return if New York or New Jersey audits your allocation of income.

Comparing the Costs of Living and Working in NJ and NY

When deciding whether to live in New Jersey or New York, it's important to weigh both the tax and cost-of-living factors:

Lower Housing Costs in NJ:
Housing in New Jersey is often more affordable, especially in suburban areas near New York City, where you can get more space for your money.

Higher Property Taxes in NJ:
While housing prices may be lower, property taxes in New Jersey are among the highest in the country, which can increase your overall expenses.

Sales Tax Differences:
New York City's sales tax rate is 8.875%, whereas New Jersey's statewide rate is 6.625%. Shopping in New Jersey’s Urban Enterprise Zones can provide additional savings.

Commuting Costs:
Commuting expenses can add up quickly. Train, bus, and gas costs, along with tolls and parking fees, are all factors to consider. Congestion pricing in Manhattan could further impact commuters who drive.

Make the Most of Your NJ and NY Tax Situation

Living in New Jersey and working in New York requires a solid understanding of your tax responsibilities. With proper planning, you can take advantage of tax credits, deductions, and strategic filing methods to reduce your tax burden. Whether you’re a salaried employee, remote worker, or self-employed, managing your tax obligations efficiently can help you keep more of your hard-earned money.

Need expert guidance? Contact NJCPA USA specializing in cross-border taxes to simplify your tax returns and maximize your savings.

FAQs

Q: Will I have to pay double taxes if I live in NJ and work in NY?
Ans: No. While you must file tax returns in both states, New Jersey provides a tax credit for taxes paid to New York, preventing double taxation.

Q: What is the Metropolitan Commuter Transportation Mobility Tax (MCTMT)?
Ans: This is a tax applied to self-employed individuals and businesses earning more than $50,000 in New York’s metropolitan area. The rate is 0.34% of net income.

Q: Do I need to pay New York City or Yonkers local taxes?
Ans: Generally, no. These taxes apply to residents of those cities. However, if you work for an NYC government agency, you may need to file an NYC-1127 return.

Q: What if I’m collecting unemployment from a New York employer but live in New Jersey?
Ans: You must report this income on your New York return. However, New Jersey does not tax unemployment compensation, so you don’t need to include it on your NJ return.