To summarize: State residents report/pay tax on all income. Nonresident report/pay tax on state-source income.
State source income is income with ties to that state.
Applied to your example (and the state tax is not 10% I used that number to make the math easy but NY and NJ are very close in tax rates.)
1) NY NR $10m(NY) --> Tax @ 10% = $1m
2) NJ Resident= $4m(NJ) + $10m(NY)= $14m --> Tax @10% = $1.4m minus $1m paid to NY (credit) = NJ Tax $.4
Total Taxpaid $1.4m
New Jersey will not object, it happens a lot between NY and NJ.
Overall, for the states, the tax they collect probably is pretty even at the end. (Not sure why they chose for NR state to tax, most likely because people who live in states with no income tax would not get taxed at all. Also a state has more control over their own state employers to take the tax withholding out).
You will see in TurboTax Credit for Taxes paid to another state.
3) New Jersey income = $14m because residents must report tax regardless of where it was earned.
@facts
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