PA income tax withheld NJ resident

[Lagoon35]

I just realized that my employer was withholding PA not NJ income tax for the past two years. I know I should have paid more attention but an accountant did my taxes for 20 and 21. It looks to me like the accountant claimed the PA income taxes as a credit on my NJ return. Is this allowed or do I need to amend? My employer didn’t withhold any NJ taxes but the credit seems to have made it so I didn’t owe NJ. 

[SharonD007]

If you live in NJ and work in PA  and have state withholding in PA, you will need to file a non-resident tax return for PA and a resident tax return for NJ. Your accountant prepared your tax returns correctly last year.

When you complete the interview screens, you will have an opportunity to allocate your income to each state. You will allocate $0 for PA and all your income to NJ. 

Review your entries in the Personal Info Section and make sure that you enter that you made money in another state so TurboTax will prompt you to complete a non-resident tax return for that state. Follow the steps below to do this:

1. Launch Turbo Tax and select Personal Info
2. A Personal info summary screen will pop up.
3. Scroll down to Other State Income and select Edit hi
4. Check your answer for Did you make money in any other states? Answer the questions stating that you made money in the state that you work in and select Continue.

Please note, prepare the state that you work in first, followed by the state you live in. 

 Please review the TurboTax article Multiple States - Figuring What's Owed When You Live and Work in More Than One State for additional information.

[TomD8]

If you haven't already done so, you should file PA Form REV-419 with your employer so as to exempt yourself from PA withholding.  Here's a link:

https://www.revenue.pa.gov/FormsandPublications/FormsforBusinesses/EmployerWithholding/Documents/rev...

[Lagoon35]

Thanks. It looks like for the past two years my accountant had filed non resident with PA but put my salary in. He then filed with NJ and used the NJ-COJ form to put the PA income tax I paid as a credit. Is that allowed? 

[TomD8]

It's not allowed.  Here's a quote from the NJ-COJ instruction booklet:

"There is a Reciprocal Personal Income Tax Agreement between New Jersey and Pennsylvania.
Compensation (salaries, wages, tips, fees, commissions, bonuses, and other payment for services rendered as an employee) paid to New Jersey residents employed in Pennsylvania is not subject to Pennsylvania income tax. Therefore, you cannot claim a credit for taxes paid to Pennsylvania on that type of income."

https://www.njportal.com/Taxation/NJ1040/Content/Docs/Instructions/43_Instructions_2021.pdf

[Lagoon35]

Should I do an amendment for the previous two years? 

[Lagoon35]

And would anyone know likely NJ would be to attach penalties to the taxes I owe them?

[TomD8]

Just my opinion, but I think the accountant who submitted the incorrect returns should do the amended returns for you.

[Lagoon35]

Just checking one more time that I’m doing this the correct way.

I paid income tax in PA as a non resident. I am going to file as a non resident and put my income in as 0 which will put what I did pay out as a refund. Correct?

Then for my NJ return as a resident I put state tax withheld at 0 which will mean I owe on my salary. My spouse and I both work in Philly and pay wage tax and once I claim those taxes and attach the NJ COJ form it wipes out most of what I owe NJ. 

For 2020 and 2021 I will need to amend because they were filed with the PA income tax as a credit. I’m assuming that I definitely need to amend those years. I was hoping they were done right but unless I’m missing a loophole they weren’t. Correct?

[DMarkM1]

Your process is correct and ultimately will end up as you state.  However, the path has a curve in it. When you file the returns, you will immediately owe NJ taxes since no taxes were withheld.  Your PA refund will take some time to process.  So basically you will initially pay NJ and then get reimbursed by PA.  You can delay paying NJ but late fees start accruing after the due date and the PA refund may not cover those.  

On the prior year returns ultimately you paid taxes to the wrong state. You will owe NJ tax plus late fees that accrue from the original due date until paid in full and then get PA refunds eventually.  

You are correct there is no "loophole;" NJ and PA have a tax reciprocity agreement as mentioned by @TomD8 and in my opinion as well, the entity that prepared the returns should make it right. 

[Lagoon35]

Thanks! Our Philly wage tax credit thankfully reduces what I owe NJ by quite a bit:) 

Would I owe penalties on the amended returns? That’s my primary concern since I’ve read they can rack up.

Unfortunately, I don’t my former accountant will be of much help.

[DMarkM1]

Yes, on the amended returns the late fees/penalties for NJ late payment start accruing after the original due date.  

Be careful.  I'm not sure of what you mean by "My PA wage tax credit thankfully reduces what I owe NJ."  Since you are filing a PA nonresident return to get the PA withheld taxes refunded, you will not be eligible for the credit for taxes paid to another state on your NJ return.  Since the taxes you paid are getting refunded you didn't pay them so there is no credit available.  

You will have to pay all the taxes to NJ for all of your income since there were no taxes withheld for NJ.  

[Lagoon35]

Oops, I meant Philly wage tax. It’s my understanding that the city does not have a reciprocal agreement and therefore can be credited.

Thanks for all the help!

[ErnieS0]

Yes. You can claim the Philadelphia wage tax paid on your New Jersey return.

If you live in NJ and work in Philly, you’ll most likely only have Philadelphia wage tax withheld because the credit will cover your NJ income tax liability for that wage.

Here’s what to do in TurboTax:

• Click State in the left column
• Click Continue on Let's get your state taxes done right
• Click Continue next to New Jersey
• Keep going until you reach Credit for Taxes Paid to Another State. Click Work on Credit
• Select Pennsylvania as State or Jurisdiction. TurboTax says For Philadelphia (or another Pennsylvania taxing authority), select "Pennsylvania". Continue
• Enter Philadelphia for Name of City, Town, Jurisdiction or Municipality. Continue
• Enter your Double-taxed income and Tax paid to Philadelphia. Philadelphia wages (W-2 Box 18) may be higher than your NJ wages because Philadelphia taxes 401(k) contributions so you may have to adjust the double-tax income and tax paid to Philadelphia amounts. 

Learn more at Credit for Income Taxes Paid to Other Jurisdictions (Wage Income).