New Jersey's Resident Credit for Taxes Paid to Other Jurisdictions

Article excerpt

A large percentage of workers in lower New York State, including New York City, are residents of New Jersey. These workers pay New York State income tax and New York City nonresident earnings taxes. In addition, those who are self-employed are subject to New York City's Unincorporated Business Tax (UBT). New Jersey grants to its residents a credit for income taxes paid to other states and their political subdivisions, including New York State and City.

The credit is calculated by multiplying the tax due to New Jersey on all income by a ratio, the numerator being income subject to tax by both New Jersey and the other jurisdiction and the denominator being income subject to tax in New Jersey. The product is compared to the tax paid to the other jurisdiction and the resulting credit is the lower of these two amounts (as long as it is not greater than the New Jersey tax liability).

Special problems arise because of the differences in individual taxation between New Jersey and New York. In the matter of Stiber v. Director of Taxation (9 NJ Tax 623 April 15, 1988), the differences and nuances of computing the credit were brought into the light.

The taxpayers computed the credit by using income taxed in New York as the numerator of the ratio and entire New Jersey taxable income as the denominator. The New Jersey Tax Court in a careful analysis of the statutes, regulations, and case law determined that there was a two-pronged test to be satisfied in computing the credit. One issue was whether income subject to tax by New York was also subject to tax by New Jersey. Since New York did not recognize ACRS depreciation, the taxpayers had to increase New York source income subject to tax in New York by the excess of ACRS over normal depreciation. However, New Jersey recognized ARCS depreciation and as a result the taxpayers were not allowed a credit for taxes paid to New York on the portion of tax represented by the ACRS adjustment. Thus, even though the income was subject to tax in New York and taxed by New York (the first prong) it failed the test to the extent of the portion not subject to tax in New Jersey (the second prong).

Another issue dealt with partnership income taxed in New York. …