NY State Tax for NJ Resident (Understanding the Calculations)

[PJackson]

Like many, I live in NJ but work in NY so all my wages are earned in NY, however all other income (dividends, bank interest, gov. bond interest etc.) are earned in my home state of NJ. However, I'm just hoping for some clarity on how my NY State taxes are calculated on Form IT-203. Here's some additional context...

1. NY adjusted gross income correctly reflects my wage-only income as it should (line 31-NY Column)
2. Federal income amount at line 32 reflects all income (dividends, bank interest, etc.) minus interest from gov. bonds (which are deductible for NY) 
3. The standard deduction is then applied and subtracted from my federal income amount, resulting in my NY taxable income (line 36 & 37)
4. NY state tax is then applied to this NY taxable income resulting in a 'Base tax' at line 44
5. NY State income (line 31) is then divided by Federal Income amount (line 32, which removes interest from gov. bonds), resulting in my ratio at line 45
6. The Ratio (line 45) is then applied to the 'Base tax' (line 44), resulting in final NY State taxes (line 50)

What I'm looking to clarify: 

• The interest from the gov. bonds are not deductible at the Federal level, so they are rightfully included in my Federal income for my Federal return, ultimately increasing my Federal tax liability.
• However, the interest from the gov. bonds are then *NOT included in the Federal income amount used in the calculation at line 45 to determine NY State tax
• And because they aren't used in this calculation, the result is a lower Federal income amount used, which results in a higher ratio --- and ultimately --- higher NY State tax 
• And so it seems, the interest from the gov. bonds are being counted to increase my Federal taxes, but then at the same time, NOT being counted in the ratio calculation to determine NY State tax which ALSO increases my NY State tax
• And so it appears it's a bit of a "having your cake and eating it too" situation 

I am by no means a tax expert and would truly appreciate any insight into an explanation for how this could be the case or what I may be missing (I'm almost certainly missing something!) Thank you!

[rjs]

The tax calculation is done the way it is because that's how the New York tax law specifies that it should be done. It's not a question of right or wrong. The New York legislature can structure the tax calculation any way they want to. There is no requirement that the tax laws be fair or logical, and different people have different ideas about what is fair or logical.

They are calculating the percentage of your income that comes from New York State sources. Both the federal and New York amounts used in that calculation include only income that would be taxable by New York if you were a New York resident. That seems reasonable to me, but that's just my opinion. You may disagree, but it's still what the New York tax law requires.