I am doing my taxes with TurboTax every year and always get the credit for taxes paid to Philadelphia. However, the amount of credit applied (line 9A in the form NJ-COJ) is always less than actual amount paid to the city as stated on W-2. This year it is about 22% less than actual amount paid. How is the credit calculated and why would it not be the full amount paid?
The credit will never be more than what New Jersey (NJ) would charge on the same income. The credit NJ allows for the city wage taxes is calculated as follows so be sure to enter the appropriate figures in your NJ tax return.
New Jersey residents earning wages in Philadelphia can determine the income to enter on line 1 of Schedule NJCOJ by dividing the wage tax deducted (as reported in the “Local income tax” box on the W-2) by the Philadelphia nonresident tax rate as follows:
The amount reported on line 1 cannot be more than the amount of Philadelphia wages included on line 15, Form NJ-1040. You must use the exact amount of Philadelphia wage tax reported on the W-2 when doing this calculation. Do not round the figure either up or down.
Sorry, but this does not answer my questions.
Here are the entries as they appear in form NJ-COJ - Credit for Income or Wage Taxes Paid to Other Jurisdiction:
The Philadelphia Tax as stated on W-2 was $4804 (appear on the line B in smart worksheet for NJ-COJ)
Line 8 Allowable Credit $6740 (as a percentage from total NJ tax we would have pay on that income after property tax deduction if all of it was earned in NJ ).
Line 9a Credit for taxes paid to other jurisdiction $3772
The credit allowed is lesser of line 8 and 9a $3772, but it is not the same amount that was paid to Philadelphia. Why the credit is not $4804? Why it is reduced to $3772.
The $6740 when prorated is $3772. The credit given is the lower of tax liabilities on the taxable income. The method for computing taxable income varies between locations along with the tax rate.
For example: $10,000 in state A might be taxable income of $9500 with a 10% tax rate for $950 liability. State B taxes all $10,000 but at 5% for $500 liability. Your credit would be the lowest, $500. You can see where different variations will have different outcomes.