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New Jersey Officials Want More Leverage in Negotiating Income Taxes for Out-of-State Commuters

New Jersey Officials have announced bipartisan legislation which hopes to give the state more leeway when it comes to how out-of-state commuters and residents who work from home are taxed. In nearby places like New York City, Connecticut, and Philadelphia these locations apply what is called a “convenience of the employer rule” on income taxes. This allows the listed places to tax your income if you work for a company within the location, even if you never cross state borders.

The Convenience of Employer Rule Explained

Under the New York “convenience of the employer” rule, the wages of an individual who is a non-New York resident, who works for a New York-based employer, is considered to constitute as a New York source income unless, the employee is obligated to work outside of the state.

Typically, the amount of tax charged by the place where the company is located will be credited to the individual paying them in the home location of the employee.  This is supposed to ensure that tax liability is ultimately evened out, however, it is not always the case as different states have different tax rates.

The Proposal

As it stands, New Jersey does not use the same system as its neighbors, however, if this legislation was to be enacted the state will create a reciprocal tax for any out-of-state workers who do not live in NJ. A reciprocal tax is a pact between two or more states not to tax the income of workers who commute into the state from another state covered by the agreement.

The proposal was announced earlier last week by New Jersey Governor Phil Murphy, and essentially will try and accomplish 3 key points. Which are allowing the state to tax workers who live in other places, (like New York, Philadelphia or Connecticut, etc.), provide a tax credit for NJ residents who sue other jurisdictions for this kind of taxation and win, as well as establish a $10 million pilot grant program for any companies that reassign or relocate residents to offices in New Jersey. “This is an issue that warrants no debate; on both sides of the aisle, we can all agree that we must protect our residents from unfair and inordinate taxation from other states,” said Murphy, in a statement last Thursday.

In Talks for Some Time

The state has said they’ve been discussing the double taxation for a multitude of years, and the large increase in employees that now work from home, which is mainly because of the COVID-19 pandemic, reinvigorated these legislative efforts. Micah Rasmussen, who is a political analyst and executive director of the Rebovich Institute for New Jersey Politics in Lawrence, explained that this would give New Jersey major leverage in fair taxation negotiations for state residents, “We are now going to play a little bit of hardball with outside jurisdictions, because we’re now going to say you work for a New Jersey company, you now have to pay New Jersey income taxes,” Rasmussen said. “And if you want it back, you’re gonna have to go back to your own state to Pennsylvania or New York, and you’re gonna have to ask them for a credit, if you don’t want to be double taxed.”

Wrap Up

With the massive amounts of workers now doing a majority of their work from home due to the effects of the pandemic, this could be major news for many and could significantly change the way their paychecks are taxed in the future. We will continue to keep an ear to the ground on the situation. However, if you commute to another state or work from home from another state, it could be a good idea to contact a trusted financial expert if you have any questions about your income taxes.

 
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