New Jersey residents employed by out-of-state companies are reminded they may be eligible for a refundable income tax credit if they have won a legal challenge against their employer’s state for taxing their pay while they were physically in New Jersey working remotely.
The tax credit was established under a 2023 law, supported by NJBIA, and applies to tax years 2020-2023. The law was in response to “convenience of employer” rules used by New York and other states that withheld payroll taxes from New Jerseyans because their pay was being sourced to their employer’s location, instead of New Jersey where they worked remotely.
The 2023 law offers New Jersey taxpayers who were working remotely a path to claim a refundable credit equal to 50% of the amount of taxes owed instead to New Jersey because of the readjustment for tax years 2020 through 2023.
“Remote work widely expanded during the pandemic, with many people who used to commute across state lines, instead working from home,” New Jersey State Treasurer Elizabeth Maher Muoio said Tuesday. “Treasury’s Division of Taxation is working diligently to ensure residents and tax preparers are aware of this refundable credit so that those who are eligible can take advantage of it.”
The credit is applicable to Tax Years 2020 to 2023. To qualify, a taxpayer must:
- Be a New Jersey resident;
- Pay income tax or wage tax to another state;
- Apply for and be denied a refund from the other state on income earned while working remotely (e.g., from home) in New Jersey;
- File an appeal of the other state’s tax assessment in an out-of-state tax court or tribunal;
- Obtain a final judgment in their favor from that tax court or tribunal; and
- Receive a refund from the other state as a result.
The refund from the other state requires an adjustment to New Jersey’s credit for taxes paid to another state and will likely result in tax due to New Jersey. However, the credit established under the law is equal to 50% of the additional tax that is owed to New Jersey.
Since the credit is refundable, the resident can receive the full value, even if the credit reduces New Jersey taxes to below zero. For example, one taxpayer has utilized this program to obtain a refund of over $7,000 from New Jersey, representing a credit of 50% of the additional tax owed to New Jersey because of a successful challenge to New York, the Division of Taxation said.
To receive the credit, the taxpayer must submit a copy of the final judgment from the other state’s tax court or tribunal with an amended NJ-1040 reducing the credit for taxes paid to another state. The final judgment in the taxpayer’s favor from the other state’s tax court or tribunal must also satisfy the other state’s laws for establishing finality.
In addition, the taxpayer may include a request for a waiver/abatement of interest and penalties, which the Division of Taxation will consider and grant on a case-by-case basis.
Detailed information is available on the New Jersey Division of Taxation’s website: https://www.nj.gov/treasury/taxation/individuals/refundablegitcredit.shtml
This legislation does not apply to Pennsylvania residents who work in New Jersey, since there is a Reciprocal Agreement in place with that state. Further, the convenience of employer sourcing rule also does not apply to Connecticut residents who work in New Jersey, based on New Jersey’s understanding that the similar Connecticut convenience rule does not apply to New Jersey residents who work in Connecticut.
Refundable Gross Income Tax Credit for New Jersey Residents Who Successfully Challenge Another State’s Imposition of the Convenience of the Employer Rule
P.L. 2023, c.125 establishes a Gross Income Tax credit for New Jersey residents who successfully win their own legal challenge to the taxing of their income by another state when the income is earned while they are located physically in New Jersey.
The credit provided under the new legislation applies to Tax Years 2020-2023.
To qualify for the credit, the taxpayer must:
- Be a New Jersey resident;
- Pay income tax or wage tax to another state;
- Apply for and be denied a refund from the other state on income earned while working remotely (e.g., from home) in New Jersey;
- File an appeal of the other state’s tax assessment in an out-of-state tax court or tribunal;
- Obtain a final judgment in their favor from that tax court or tribunal; and
- Receive a refund from the other state as a result.
The final judgment in the taxpayer’s favor from the other state’s tax court or tribunal must also satisfy the other state’s laws for establishing finality. This includes a New York State Order of Discontinuance issued by their Division of Tax Appeals and a corresponding Joint Stipulation of Discontinuance to verify that a final judgment was obtained by the taxpayer.
The refund from the other state requires an adjustment to New Jersey’s credit for taxes paid to another state and will likely result in additional tax due to New Jersey. However, the credit provided under the new legislation allows a credit of 50% of the additional tax that is owed to New Jersey. This credit is refundable, meaning the resident can receive the full value, even if the credit reduces New Jersey taxes to below zero.
To receive the credit, the taxpayer must submit a copy of the final judgment from the other state’s tax court or tribunal with an amended NJ-1040 reducing the credit for taxes paid to another state. In addition, the taxpayer may include a request for a waiver/abatement of interest and penalties, which the Division will consider and grant on a case-by-case basis.
Taxpayers should submit all of the above to the New Jersey Division of Taxation, Gross Income Tax Audit Branch, PO Box 288, Trenton, NJ 08695-0288, attention: Chief.
