N.J. Admin. Code § 18:35-4.1

Current through Register Vol. 56, No. 21, November 4, 2024

Section 18:35-4.1 - Computation of credit for taxes paid to other jurisdictions

(a) The following provisions shall govern the computation of the tax credit by reason of any income or wage tax paid to another state or political subdivision of such state pursuant to the New Jersey Gross Income Tax Act (Act.)

1.54A:4-1 provides for a credit against the New Jersey gross income tax as follows: Resident credit for tax of another state.

i. A resident taxpayer shall be allowed a credit against the tax otherwise due under this Act for the amount of any income tax or wage tax imposed for the taxable year by another state of the United States or political subdivision of such state, or by the District of Columbia, with respect to income which is also subject to tax under this Act, except as provided by (a)3 below.

ii. The credit provided under this section shall not exceed the proportion of the tax otherwise due under this Act that the amount of the taxpayer's income subject to tax by the other jurisdiction bears to his or her entire New Jersey income.

2. The credit against the New Jersey tax applies with respect to the income tax or wage tax paid in the other state or political subdivision thereof on income which is also subject to tax under the New Jersey Act. Therefore, there shall be excluded from the income in the other state any income which is not subject to tax under the New Jersey law.

3.54A:4-1(b), (c), and (d) provide for a limitation on the credit for tax paid to another state or political subdivision. The amount of the resident taxpayer credit for tax paid to another state or political subdivision shall not exceed the percentage derived by dividing income subject to tax in the other jurisdiction by the taxpayer's entire New Jersey income multiplied by the tax otherwise due under the New Jersey Gross Income Tax Act.

i. No credit shall be allowed for any income tax or wage tax imposed on S corporation income allocated to this State as determined in accordance with 54A:5-10.

(1) When the New Jersey corporation business tax allocation factor is 100 percent but the S corporation in fact pays tax to another state based on or measured by income, the amount of income taxed, which qualifies for a reduction on the New Jersey corporation business tax return, is deemed S corporation income allocated outside of New Jersey. This S corporation income is subject to the gross income tax. In addition, if the taxpayer is required to file a personal income tax return in the other jurisdiction reporting the S corporation income, the taxpayer would be eligible for credit for taxes paid to another jurisdiction.

(2) Payment of a minimum tax to another state by an S corporation does not fulfill the criteria of (a)3i(1) above. Therefore, income is not deemed to be S corporation income allocated outside of New Jersey for gross income tax purposes. If the taxpayer is required to file a personal income tax return in the other jurisdiction reporting S corporation income, the taxpayer is not eligible for a credit for taxes paid to the other jurisdiction.

(3) When an S corporation with a New Jersey corporation business tax allocation factor of 100 percent reports entire net income that is subject to Federal corporate income taxation on the New Jersey corporation business tax return and the corporate tax return of another state and the tax paid to the other state qualifies for a reduction on the New Jersey corporation business tax return, the amount of income taxed by both jurisdictions is deemed S corporation income allocated outside of New Jersey. If the taxpayer is required to file a personal income tax return in the other jurisdiction reporting the S corporation income, the taxpayer is eligible for a credit for taxes paid to another jurisdiction, subject to statutory limitations, including those in 54A:4-1(b), (c), and (d).

ii. No credit shall be allowed for any income tax or wage tax imposed on S Corporation income allocated to this State as determined in accordance with 54A:5-10.

(1) When the New Jersey Corporation Business Tax allocation factor is 100 percent but the S Corporation in fact pays tax to another state based on or measured by income, the amount of income taxed, which qualifies for a reduction on the New Jersey Corporation Business Tax return, is deemed S Corporation income allocated outside of New Jersey. This S Corporation income is subject to the Gross Income Tax. In addition, if the taxpayer is required to file a personal income tax return in the other jurisdiction reporting the S Corporation income, the taxpayer would be eligible for credit for taxes paid to another jurisdiction.

(2) Payment of a minimum tax to another state by an S Corporation does not fulfill the criteria of (a)3ii(1) above. Therefore, income is not deemed to be S corporation income allocated outside of New Jersey for gross income tax purposes. If the taxpayer is required to file a personal income tax return in the other jurisdiction reporting S Corporation income, the taxpayer is not eligible for a credit for taxes paid to the other jurisdiction.

(3) When an S Corporation with a New Jersey Corporation Business Tax allocation factor of 100 percent reports entire net income that is subject to Federal corporate income taxation on the New Jersey Corporation Business Tax return and the corporate tax return of another state and the tax paid to the other state qualifies for a reduction on the New Jersey Corporation Business Tax return, the amount of income taxed by both jurisdictions is deemed S corporation income allocated outside of New Jersey. If the taxpayer is required to file a personal income tax return in the other jurisdiction reporting the S Corporation income, the taxpayer is eligible for a credit for taxes paid to another jurisdiction, subject to statutory limitations, including those in 54A:4-1(b), (c) and (d).

iii. No credit shall be allowed for the amount of any taxes paid or accrued for the taxable year on or measured by profits or income imposed on or paid on behalf of a person other than the taxpayer, whether or not the taxpayer may be liable for the tax.

4. For the purpose of calculating the resident credit for taxes of another state, "taxpayer" means any individual, estate or trust required to report or pay taxes, interest and penalties under the Gross Income Tax Act, or whose income in whole or part is subject to the tax imposed by the Gross Income Tax Act.

5. If the tax of another state or political subdivision is readjusted for more or less of the tax of another state or political subdivision than taxpayer is finally required to pay, the taxpayer shall send notice of the difference to the Director who shall redetermine the tax liability for any years affected, regardless of any otherwise applicable statute of limitations, provided that:

i. The taxpayer is allowed a credit under this section;

ii. The taxpayer has filed a return with the other jurisdiction prior to the readjustment; and

iii. The taxpayer claimed a credit for taxes paid to that other jurisdiction on the original New Jersey tax return.

6. For purposes of determining the percentage, as provided in (a)3 above, for limitation of the tax credit:

i. Income subject to tax by the other jurisdiction means those items of income that are taxed by another jurisdiction before the allowance for personal exemptions and standard and/or other itemized deductions and which are also subject to tax under the New Jersey Gross Income Tax Act. "Subject to tax" is defined as income actually taxed.

ii. Entire New Jersey income means the New Jersey gross income subject to tax before allowances for personal exemptions and deductions.

iii. Adjustment must be made in the numerator for taxpayers who claim credit for income in the numerator which has been only partially taxed by the other jurisdiction.

iv. The actual tax paid to the other jurisdiction is the amount of tax that is due after deduction of all tax credits allowed by that jurisdiction (for example, child and dependent care, new job, research and development), but before the deduction of any payments made by the taxpayer, whether made as withholdings, estimated payments, extension payments, or an overpayment from a prior year.

v. Where there is a reduction in the numerator of the credit fraction for the allowable credit, there must be a corresponding reduction in the allowable tax paid.

7. As a result of the Reciprocal Personal Income Tax Agreement between the Commonwealth of Pennsylvania and the State of New Jersey, wages, salaries, and other compensation paid to New Jersey residents employed in Pennsylvania are not subject to Pennsylvania income tax. Thus, a New Jersey resident may not claim a credit for taxes paid to Pennsylvania on employee compensation.

8. Taxes paid on income by a resident taxpayer to any municipality of Pennsylvania are eligible for the resident tax credit. For example, taxes paid under the City of Philadelphia Wage Tax would be eligible.

i. A W-2 Form must be attached to the New Jersey Gross Income Tax Resident Return (Form NJ-1040) to indicate the name of the municipality, the amount subject to the municipal Wage Tax, and the amount of tax withheld.

9. The New Jersey tax on gross income does not tax partnerships directly. See N.J.S.A. 54A:2-2. Income taxes measured by profits or income, and paid by a partnership to another jurisdiction are deemed taxes paid by the individual partner and, as such, are eligible for the resident credit. For example, the New York City Unincorporated Business Tax, the Philadelphia Business Income and Receipts Tax and Net Profits Tax are taxes paid by the partnership, which are eligible for the resident credit. The Texas Margin Tax is not an income tax and, therefore, a credit is not allowed.

i. The partner must retain adequate records, to be submitted upon request to the Division, to substantiate the credit claimed, such as a copy of the partnership's tax return indicating the amount of the profits or income subject to tax and the amount of tax paid; or

ii. A statement on the partnership's letterhead listing the jurisdiction, the taxpayer's share of gross income taxed by the other jurisdiction, and any other information the Director may require is considered prima facie evidence of such amount of tax paid to the taxing jurisdiction and/or political subdivision.

10. Any income that has been excluded or deducted from taxable gross income of another jurisdiction or which has not been taxed by another jurisdiction shall not be included in the numerator of the credit fraction. Example: If a portion of long-term capital gains from the sale of property in State A is excluded from taxable income in that state, such excluded portion shall not be included in the numerator of the credit fraction. In addition, income that is not included in entire New Jersey income shall not be included in the numerator.

i. A partner must adjust his or her share of the distributive share of partnership income in the numerator of the credit calculation for adjustments allowed by New Jersey but not other jurisdictions. This section also applies to composite returns.

11. When determining the resident credit allowed, as defined in this section, a New Jersey resident taxpayer shall not combine in the numerator (Schedule A, Line 1, NJ-1040) the same income subject to tax by the jurisdiction and/or its political subdivision. The amount of income or wage tax during the tax year shown on Schedule A, Box B, NJ-1040) for the taxpayer paying both a tax to another state and to a political subdivision of such state would be the total amount of state income tax and income tax or wage tax paid to the other state and political subdivision of such state, where the same amount of income is subject to tax in both the other state and political subdivision of such state. If the income subject to tax in both the other state and political subdivision of such state is not equal, a separate calculation shall be made of the excess income to arrive at the limitation of the credit for the income tax or wage tax paid to the other state and political subdivision of such state.

i. When claiming a credit for the taxes paid to another jurisdiction and/or political subdivision, the taxpayer must retain a signed copy of the tax return filed with the other jurisdiction and/or political subdivision showing the amount of the tax paid and must make it available at the Division's request.

(1) Taxpayers filing electronically with New Jersey must retain a copy of such signed return filed with the other jurisdiction and all supporting schedules and must make them available at the Division's request.

(2) If the taxpayer filed electronically in the other jurisdiction, a copy of the electronically filed income tax return(s) alone is not sufficient. Electronic filers must also submit schedules, worksheets, etc., which document the income, by nature and source, being taxed by the other jurisdiction.

(3) A W-2 form or its equivalent which indicates the withholding of income tax in another jurisdiction and/or political subdivision is considered prima facie evidence of such amount of tax paid only if the taxing jurisdiction and/or political subdivision imposing an income tax or wage tax does not have a tax return.

(4) If the taxpayer is a member of a group which files a composite return with another jurisdiction, a statement on the filing entity's letterhead listing the jurisdiction, the taxpayer's share of gross income taxed by the other taxing jurisdiction, and the taxpayer's share of tax paid is considered prima facie evidence of such amount of tax paid to the taxing jurisdiction and/or political subdivision.

ii. If a taxpayer claims credit for taxes paid to more than one state on income earned in that state, a separate computation for the proportional credit limitation shall be made for each such state.

iii. If a taxpayer claims credit for taxes paid to one jurisdiction for different amounts of income taxed at different tax rates, a separate computation for the proportional credit limitation shall be made for each different amount of income.

12. The credit for tax paid to other jurisdictions must be determined in accordance with the following examples:

i. Example 1--Determining the denominator of the credit calculation fraction.

INCOME SUBJECT TO TAX BY NEW JERSEY

	Taxpayer A Without Pension	Taxpayer B With Pension Less Exclusion(s)
Wages	$70,000
Interest	$250	$4,000
Dividends	$400	$2,500
Gains		$1,525
Pension/Annuity/IRA		$30,000
Pension Exclusion		($15,000)
Taxable Pension		$ 15,000
S Corporation Income	$21,000
Income Subject to Tax Before Exemptions and Deductions	$91,650	$23,025

ii. Example 2--Determining the credit for income taxed both by another state and by a city within that state when the state and city are taxing the same amount of income. INCOME SUBJECT TO TAX

	New Jersey	Other State	Other City
Wages	$ 45,000	$ 30,000	$ 30,000
Income Subject to Tax	$ 45,000	$ 30,000	$ 30,000
Before Exemptions and
Deductions
Less Exemptions	($ 2,000)
New Jersey Taxable Income	$ 43,000
Tax	$ 683	$ 1,600	$ 135
Numerator of the Credit			$ 30,000
Calculation

iii. Example 3--Determining the credit when income is taxed by two different states outside of New Jersey. INCOME SUBJECT TO TAX

	New Jersey	New York	Delaware
Wages	$ 20,000	$ 12,000	$ 8,000
Interest	$ 1,000
Dividends	$ 2,000
New York Adjustments		($ 1,500)
Income Subject to Tax	$ 23,000	$ 10,500	$ 8,000
Before Exemptions and
Deductions
Less Exemptions	($ 2,000)
New Jersey Taxable Income	$ 21,000
Tax	$ 298	$ 600	$ 130
Numerator of the Credit	($ 10,500)	($ 8,000)
Calculation

iv. Example 4--Determining the numerator of the credit calculation fraction when the taxpayer allocates his income in the other jurisdiction.

INCOME SUBJECT TO TAX

	New Jersey	Jurisdiction	Both
Wages	$ 125,000	$ 100,000	$ 100,000
Income Subject to Tax Before	$ 125,000	$ 100,000	$ 100,000
Exemptions and Deductions
Less Exemptions	($ 1,000)
New Jersey Taxable Income	$ 124,000
Tax	$ 5,773	$ 4,800
Numerator of the Credit
Calculation			$ 100,000

v. Example 5--Determining the numerator of the credit calculation fraction when part of New Jersey income is taxed by the other jurisdiction.

INCOME SUBJECT TO TAX

	New Jersey	Jurisdiction	Both
Wages	$ 12,500	$ 12,500	$ 12,500
Interest	$ 2,000
Dividends	$ 3,000
Capital Gains	$ 21,000
Income Subject to Tax	$ 38,500	$ 12,500	$ 12,500
Before Exemptions and
Deductions
Less Exemptions	($ 2,500)
New Jersey Taxable Income	$ 36,000
Tax	$ 560	$ 400
Numerator of the Credit
Calculation			$ 12,500

vi. Example 6--Determining the credit for wage income earned in another jurisdiction if wages were reduced by allowable deductions for New Jersey tax purposes. Determining the actual tax paid to the other jurisdiction on wages taxed by both New Jersey and the other jurisdiction.

INCOME SUBJECT TO TAX

	New Jersey	Philadelphia	Both
Wages	$500,000	$500,000
Less 401(k)	($30,000)		$470,000
Contributions
Wages Less 401(k)	$470,000
Contributions
Interest	$100,000
Dividends	$200,000
Income Subject to Tax Before Exemptions and Deductions	$770,000	$500,000	$470,000
Less Exemptions	($1,000)
Medical Deduction	($5,000)
New Jersey Taxable	$764,000
Income Tax	$51,488	$18,858
Numerator of Credit			$470,000
Calculation

Calculation of tax paid to other jurisdiction on wages taxed by both New Jersey and other jurisdiction.

Wages taxed by both jurisdictions $4	70,000 = 94% of wages are allowable in numerator
Wages taxed by Philadelphia	$500,000
Tax paid to Philadelphia	$18,858
Adjustment %	x 94%
Actual tax paid on wages allowable in numerator	$17,727
Calculation of Maximum Credit Allowable
$470,000/$764,000 X $51,488 =$31,675
Actual tax paid on wages allowable in numerator $17,727

Credit allowed is $17,727, the lower of the maximum credit allowable or the actual tax paid to the other jurisdiction on income taxed by both New Jersey and the other jurisdiction.

vii. Example 7--Determining the credit when there is partnership income earned in two different jurisdictions outside New Jersey and a separate New Jersey partnership which has a loss.

INCOME SUBJECT TO TAX

	New Jersey	State 1	State 2
Wages	$100,000
Interest	$200
Partnership Income
Partnership ABC		$10,000
Partnership XYZ			$5,000
Partnership KLM	7,000
Partnership GSS	($10,000)
Income Subject to Tax Before Exemptions and Deductions	$110,200	$10,000	$5,000
Less Exemptions	($1,000)
New Jersey Taxable	$109,200
Tax	$4,830	$650	$150
Effective Tax Rate		6.50%	3.00%
Numerator of Credit Calculation		$10,000	$0

viii. Example 8--Determining the credit for income taxed by New York State and New York City Unincorporated Business Tax (UBT).

INCOME SUBJECT TO TAX

	New Jersey	New York	UBT
Wages	$25,000
Interest	$15,000
Dividends	$10,000
Capital Gains	$25,000
Net Profits from	$100,000	$75,000	$100,000
Business
Income Subject to Tax	$175,000	$75,000	$100,000
Before Exemptions and Deductions
Less Exemptions	($2,000)
New Jersey Taxable	$173,000
Income Tax	$6,978	$6,600	$4,000
Numerator of the Credit Calculation		$75,000	$25,000

(1) Example 8a--Determining the credit for income taxed by New York State and New York City Unincorporated Business Tax (UBT) when there is income taxed by New York City, which is not taxed by New Jersey.

		New Jersey	New York	UBT
	Wages	$50,000	$25,000
	Interest	$10,000
	Dividends	$20,000
	Capital Gains	$15,000
	Partnership Income	$200,000*	$100,000**	$110,000***
	Keogh deduction		($10,000)
	Income subject to tax Before Exemptions and Deductions	$295,000	$115,000	$110,000
	Exemptions	($12,000)
	New Jersey Taxable	$283,000
	income Tax	$16,980	$7,475	$4,400
	Numerator of the Credit Calculation		$115,000	$10,000****
*	Partnership income per Federal K-1 Ordinary Income			$200,000
**	50% of partnership income allocated to New York State			$100,000
***	UBT partnership income
	50% of Ordinary Income			$100,000
	UBT adjustments not required for Federal or New Jersey purposes			$10,000
	Total UBT			$110,000
****	UBT Credit Numerator
	Total partnership income			$110,000
	Amount used in determining New York State credit			($90,000)
	Income not taxed by New Jersey			($10,000)
	Allowable Numerator			$10,000

ix. Example 9--Determining the credit when S corporation income is reported on the other jurisdiction's return in separate categories.

INCOME SUBJECT TO TAX

		New Jersey	Other Jurisdiction	Both
Wages		$100,000
Interest		$0
Personal Interest		$200
S Corporation Interest			$2,500	$2,500
Interest	2,500	$37,500
S Corporation Income		$35,000	$35,000	$35,000
Ordinary Interest		$2,500
Income Subject to Tax		$137,700	$37,500	$37,500
Before Exemptions and
Deductions
Less Exemptions		($1,000)
New Jersey Taxable Income		$136,700
Tax		$6,582	$2,625
Numerator of the Credit Calculation				$37,500

x. Example 10--Schedule C adjustments to income which are also taxable to New Jersey are included in the numerator of the credit calculation fraction.

INCOME SUBJECT TO TAX

	New Jersey	Other Jurisdiction	Both
Wages	$100,000	$100,000	$100,000
Interest	$200
Net Profits from Business	$35,000	$25,000	$25,000
Taxes Based on Income	$1,000	$1,000	$1,000
Income Subject to Tax	$136,200	$126,000	$126,000
Before Exemptions and Deductions
Less Exemptions	($1,000)
New Jersey Taxable	$135,200
Income Tax	$6,486	$8,820
Numerator of the Credit Calculation			$126,000

xi. Example 11--Determining the credit for Philadelphia partnerships subject to the Philadelphia Business Income & Receipts Tax (BIRT), Philadelphia Net Profits Tax (NPT), and the Pennsylvania Income Tax.

INCOME SUBJECT TO TAX

	New Jersey	PA Income	Phila BIRT	Phila NPT
Wages	$100,000
Interest	$200
Partnership ABC	$500,000	$225,000	$275,000	$275,000
Income Subject to	$600,200	$225,000	$275,000	$725,000
Tax Before
Exemptions and
Deductions
Less Exemptions	($1,000)
New Jersey	$599,200
Taxable Income
Tax Liability	$36,043	$6,300	$17,875	$10,909
Less BIRT Credit				($10,725)
(17,875 x 60%)
Tax	$36,043	$6,300	$17,875	$184
Effective Tax Rate		2.80%	6.50%	0.067%
Actual Tax Paid to
Other Jurisdiction
PA State Tax	$6,300
Philadelphia BIRT	$17,875
Philadelphia NPT	$184
Total Tax	$24,359
Numerator of Credit				$275,000
Calculation

xii. Example 12--Determining the credit when there is a loss useable in the other jurisdiction and there is business income allocated to New Jersey and another jurisdiction and New Jersey allows expenses/adjustments the other jurisdiction does not. Determining the actual tax paid to the other jurisdiction on business income taxed by both New Jersey and the other jurisdiction.

	New Jersey	New York	Both
Wages	$140,000	$80,000	$80,000
Interest	$80,000
Dividends	$20,000
Capital gains	$10,000	($3,000)*	($3,000)
Partnership Income	$340,000*	$200,000	$170,000**
Other Deductions		$25,000***	($10,000)****
Less Exemptions	($2,000)
Medical deduction	($8,000)
Taxable Income	$580,000	$255,000
Tax	$34,983	$15,300
Numerator of Credit	$237,000
Calculation
Credit Allowed	$14,052
* Partnership income per Federal K-1		$400,000
Additional expenses/deductions allowed:
401(k) deduction		$30,000
Excess meals & entertainment		$10,000
Club dues		$10,000
Miscellaneous partner expenses		$10,000
New Jersey partnership income		$340,000 - 50% allocated to New Jersey

** New York allocated share of partnership income $340,000 X 50% = $170,000

*** New York other deductions

401(k) $15,000

Keogh $10,000

**** Other deductions used in determining the numerator New York Keogh adjustment of $10,000

The New York 401(k) deduction of $15,000 was used in arriving at the New York partnership adjusted income of $170,000

Maximum Credit Allowable:

($240,000 X $34,983) / $580,000 = $14,476

Tax paid to New York on $255,000 of income $15,300

Tax paid to New York on $240,000 of income same as taxed by New Jersey $14,400, calculated as follows:

($240,000 X $15,300) / $255,000 = $14,400

Credit allowed is the lower of the allocation formula or the tax paid to the other jurisdiction on the same income taxed by New Jersey, $14,000

N.J. Admin. Code § 18:35-4.1

Amended by 48 N.J.R. 295(a), effective 2/16/2016

Amended by 56 N.J.R. 1745(a),effective 8/19/2024