By Roman, J. Joseph
The CPA Journal , Vol. 64, No. 10
A New Jersey resident taxpayer who generates income as a sole proprietor in the city of Philadelphia will pay higher taxes than an employee who lives in New Jersey and works in Philadelphia.
The following example will illustrate this problem. A New Jersey resident who provides consulting services in Philadelphia generating $70,000 of income reports income for Federal purposes on Schedule C as a sole proprietor. Since the services are performed in the City of Philadelphia, she is required to file a Philadelphia Net Profits Tax Return and pay $3,018.75 ((at)4.3125%) to the city. As a non-resident of Pennsylvania who performs services in that state, she is also required to file a Pennsylvania Non-Resident Tax Return and pay taxes of $1,960 ((at)2.8%). Finally, as a New Jersey resident, she is required to file a New Jersey Resident Income Tax Return and pay taxes (on the same $70,000) of $4,900 ((at)7%).
As a New Jersey resident, she is entitled to a tax credit against NJ income tax, since she has income from sources outside New Jersey (Section 54A; 4-1(a), RS). However, pursuant to the instructions for Schedule A of the NJ-1040, "if the amount subject to tax by two jurisdictions is the same, complete Schedule A for only one jurisdiction."
As a result, she will be able to claim a credit for the Philadelphia net profit tax of $3,018.75 but not for the Pennsylvania non-resident tax of $1,960. The end result is she will pay $1,960 to Pennsylvania and another $1,881.25 ($4,900 less $3,018.75 credit from Philadelphia NP to the State of New Jersey on the same income of $70,000. …