1. Overview of New Jersey State Income Tax
The New Jersey state personal income tax is levied on individuals that are residents of New Jersey as well as nonresidents of New Jersey. New Jersey residents are taxed on their worldwide income while nonresidents are taxed only on income earned in New Jersey (such as wage income from work days in New Jersey).
New Jersey taxable income is computed in a similar manner as federal taxable income with a variety of differences. Generally, New Jersey tax law follows federal tax law as far as items of income that are taxable and deductions that are allowed, with some major exceptions. For example, social security benefits and unemployment compensation are exempt from New Jersey tax. Some differences from federal tax law in allowable deductions are noted below.
New Jersey imposes tax at graduated rates between 1.4% and 8.97%. The highest tax rate (8.97%) applies to all taxable income above US$500,000. New Jersey tax returns are due the 15th day of the 4th month following the tax year. A 4 month extension for filing the New Jersey return may be requested by filing Form NJ-630, if a tax payment is due, or New Jersey will accept a copy of the federal extension for filing (Form 4868). At least 80% of New Jersey tax must be paid by April 15th.
A New Jersey resident includes:
- An individual who is domiciled in New Jersey for the entire year, unless the individual does not have a permanent place of abode in the state, maintains a permanent place of abode elsewhere, and spends no more than 30 days of the tax year in New Jersey, or
- An individual who is not domiciled in New Jersey, but who maintains a permanent place of abode in the state for the entire year and spends more than 183 days of the tax year in the state.
Although spending more than 183 days in New Jersey during the tax year can create a presumption of residence, the presumption can be overcome by showing that the stay in New Jersey is for a temporary or transitory purpose. A place of abode is not considered if it is maintained only during a temporary or limited period for the accomplishment of a particular purpose, such as a temporary job assignment.
Domicile is the place where the taxpayer has a permanent home. It is the place where the taxpayer intends to return if they are living or working temporarily in another state or country. Some items considered in determining "legal domicile" are: location of residences, where the individual spends their time, location of personal possessions, the individual's active business involvement, and family connections.
If an individual is resident in New Jersey, the individual is subject to New Jersey income tax on all worldwide income earned during the period of New Jersey residency.
Residency is determined separately for each person. It is possible that one spouse can be resident in New Jersey while the other is not. Generally, your filing status for New Jersey tax purposes is the same as for federal tax purposes. However, if your spouse was not a New Jersey resident and had no New Jersey source income, then you can file a married filing separate tax return. Spouses may be resident in New Jersey for different portions of the tax year (such as in the case of a trailing spouse during a relocation). Couples with different residence statuses can elect to file jointly and determine their joint income as if both spouses were residents.
3. Treatment of Part-year Residents
Part-year residents must prorate all exemptions, deductions and credits based upon the numbers of months of the year as New Jersey resident. Part-year residents are generally taxed in New Jersey on their worldwide income for the part of the year in which they are resident. A part-year resident (and nonresidents as well) must first determine their New Jersey tax based on their full year taxable income (computed according to New Jersey rules). Then, New Jersey tax is prorated based on the percentage of New Jersey income to full-year worldwide income. This methodology is different than most states and may have the affect of taxing part-year residents at higher tax rates.
4. Avoiding Double State Taxation
New Jersey allows resident and part-year resident taxpayers to claim a credit for taxes paid to another state on income that is subject to both New Jersey income tax and income tax in the other state. The amount of the credit is the lesser of the income tax paid to the other state or the New Jersey income tax that is due on the double-taxed income. This might be the case if you are domiciled in New Jersey, but work in another state.
However, New Jersey has a reciprocity agreement with the state of Pennsylvania for compensation income. Compensation paid to New Jersey residents employed in Pennsylvania is not subject to the Pennsylvania income tax.
5. Home Sale Treatment
New Jersey follows the federal law for taxing the gain on the sale of a principal residence. Further, any loss on the sale of a principal residence is not deductible (the same as federal purposes).
6. Moving Expense Treatment
Moving expenses are not deductible for New Jersey gross income tax purposes. However, taxpayers may exclude reimbursements for qualified moving expenses if the federal requirements to claim moving expenses were met and the expenses were included in W-2 taxable wages.
7. Allowable Deductions
New Jersey allows personal exemptions to reduce taxable income. New Jersey does not have a standard or itemized deductions, but allows specific deductions for medical expenses and property tax. Unreimbursed medical expenses are deductible in excess of 2% of gross income. Taxpayers who took the standard deduction on the federal return can deduct medical expenses and property tax on the state return.
Overall net losses are not allowed on the New Jersey tax return. A loss within one category of income may only be applied against other income within the same category. No carryback or carryover of losses is allowed under New Jersey law.
Employee business expenses are not deductible for New Jersey gross income tax purposes. However, a taxpayer may exclude reimbursements for employee business expenses reported as W-2 wages.
8. Special Rules for U.S. Expatriates
New Jersey does not accept the automatic federal extension until June 15th for U.S. persons that are outside the country on April 15th.
New Jersey does not allow the foreign earned income and housing exclusions that may be claimed for federal tax purposes.
New Jersey does not allow a credit for income taxes paid to other countries.
9. Special Rules for Visa Holders Living or Working in New Jersey
It is possible for a foreign national to claim nonresident status in New Jersey for an extended period of time if their domicile is not in New Jersey and they are in New Jersey for temporary or transitory purposes. This might be advantageous if the foreign national has significant foreign investments that would be subject to New Jersey tax as a New Jersey resident.
10. Where to get New Jersey State Income Tax Information and Forms
The New Jersey Division of Taxation web site is an excellent source of information including forms and filing instructions at www.state.nj.us/treasury/taxation.
If you are a New Jersey full-year or part-year resident, you will need to file Form NJ-1040. If you are a nonresident of New Jersey, you will need to file Form NJ-1040NR.