State tax filing

rjs · ‎June 21, 2020

I created a test tax return based on the information you gave, and I tried several different ways of doing the state returns. I have to say that it's horrendously complicated and confusing, and I'm not certain that I got it all right. TurboTax will create the two New Jersey returns for you, but it's not automatic. You have to help it along. Information doesn't flow smoothly between the states. Here's what I've been able to figure out.

TurboTax creates the two New Jersey returns, resident and nonresident, at the same time. You don't do one and then the other. The interview questions can be confusing because they sometimes refer to "your New Jersey return" without making it clear which NJ return they're talking about. It appears that the handling of this scenario is not really fully developed.

I don't see any way to handle your situation by just going straight through one state and then straight through the other state. Each state gives you a credit for tax paid to the other state (on different income), so there is an interaction between the two states. No matter which state you do first, you are going to have to go back to the first state after you finish the second state. And you might even have to make a second pass through the second state.

You get a credit on your NJ resident return (NJ-1040) for part of the tax paid to NY on the NY W-2 income that you earned while a NJ resident. This credit will probably eliminate any tax on your NJ resident return. On your NJ nonresident return (NJ-1040NR) you will have a small amount of tax due on the NJ rental income that you earned while a NY resident. You will get a credit for that NJ tax on your NY part-year resident return.

It doesn't really matter which state you do first. The final results are the same. I suggest doing NJ first, then NY, simply because you can probably avoid having to go through NY a second time.

Note that investment income - interest, dividends, and capital gain - is attributed to the state that you lived in when you received the income. For example, a dividend that you received when you lived in New York is New York income. A dividend that you received when you lived in New Jersey is New Jersey income. When you do your federal return you just enter the total amounts for the year from your 1099-INT, 1099-DIV, and 1099-B forms. But at various points in the state interviews you will have to enter the amounts attributable to one state or the other. Read all the questions carefully.

The first time through NJ, when you get to the credit for taxes paid to another state, skip the credit. It might then tell you that you may owe interest on an underpayment of estimated tax. That's because you don't yet have the credit for tax paid to NY. Click "Calculate" to skip the topic. When you finish the NJ return, switch to forms mode and write down the amounts on Form NJ-1040NR lines 41 and 55. (They will probably be the same.)

Now go back to Step-by-Step mode and do the NY return. In the NY interview, on the screen that says "Take a look at New York credits and taxes," click Start for "Taxes Paid to Another State." After a few screens it will tell you that "TurboTax does not currently compute an amount of tax for New Jersey," and it will give you a box to enter the amount of New Jersey tax. Enter the tax from Form NJ-1040NR line 41. The next screen says "Enter New Jersey Information." It has three boxes. You will leave the first two boxes empty because you had no NJ tax withheld and made no NJ estimated tax payments, and you get no refund on either NJ return. In the third box, "Balance Due to New Jersey," enter the amount you owe on Form NJ-1040NR line 55. Ignore the balance due on Form NJ-1040. When you finish the NY return, switch to forms mode again and write down the New York adjusted gross income from New York Form IT-203 line 31 in the New York State amount column (the second column), and the total New York State taxes from Form IT-203 line 50.

Now go back and edit the NJ return. Click the Update button for Taxes and Credits. Go through the Property Tax Deduction or Credit again to get back to Credit for Taxes Paid to Another State. This time click Work on Credit. When you get to the screen that asks for "Double-taxed income while a resident of New Jersey," enter the New York adjusted gross income from Form IT-203 line 31 in the New York State amount column (the second column). For "Tax paid to New York," enter the total New York State taxes from Form IT-203 line 50.

At this point the tax on Form NJ-1040 line 43 should be zero. If it's not, you will have to go back to the New York credit for tax paid to another state and add the amount on NJ-1040 line 43 to the amount of NJ tax that you entered.

I think this will give you correct state tax returns for New York part-year resident, New Jersey part-year nonresident, and New Jersey part-year resident.

(A note to anyone else reading this in the future: This discussion is very specific to the particular facts presented in the question, and to the specific states and types of income. It might not apply to any other situation.)