The New Jersey Division of Taxation has recently updated its guidance on how taxpayers should calculate the credit for taxes paid to other jurisdictions. This update, outlined in Technical Bulletin No. GIT-3B (effective January 1, 2025), clarifies what income qualifies for the credit and provides distinctions regarding what is properly taxable by another state. Martin D. Hauptman, Partner in our Tax, Trusts, and Estates Practice Groups at Mandelbaum Barrett PC, breaks down these updates to ensure taxpayers take full advantage of available credits while remaining compliant.
What Is the Credit for Taxes Paid to Other States?
New Jersey allows residents to claim a credit for taxes paid to other states on income that is properly taxed by both jurisdictions. However, not all income qualifies for this credit. The state has strict guidelines on what income can be included in the calculation, ensuring taxpayers do not claim credits on income that New Jersey does not consider taxable by another jurisdiction.
Types of Income Eligible for the Credit
To be eligible for the credit, income must be properly taxed by another state. The following types of income qualify:
- Wages from Services Rendered – Income earned from employment or services performed in another state
- Business Profits – Net income from a business, trade, or profession conducted within another state, including interest earned by the business
- Partnership or S Corporation Income – Income allocated to another state based on the business’s operations
- Real or Tangible Personal Property – Income generated from owning or selling property located in another state
- Gambling Winnings – Winnings from gambling activities conducted in another state
- Estate or Trust Distributions – Income from an estate or trust that originates from any of the categories listed above
Income That Does Not Qualify for the Credit
Certain types of income are not considered properly taxable by another state and therefore do not qualify for the credit. These include interest, dividends, and capital gains; personal income from stocks, bonds, and other intangible assets do not qualify, unless derived from a business operating in another state. Furthermore, passive investment income that do not come from active business operations in another state are also not eligible. If a taxpayer mistakenly claims a credit on ineligible income, they may be subject to additional tax liabilities or an audit by the state.
What Should Taxpayers Do Next?
Taxpayers who earn income in multiple states should carefully review their tax filings to ensure they correctly apply the credit.
To ensure you meet the eligibility requirements for the credit, start by reviewing your income sources to confirm that any income claimed complies. It’s also important to check the taxation rules of other states, as each state has varying tax rules, and you need to ensure that your income is being properly taxed in any other state where applicable. If you’re unsure about any of these steps, consulting a tax professional is a good idea, as their guidance can help prevent costly mistakes and ensure your tax filings are accurate.
New Jersey’s updated guidance ensures that taxpayers claim the credit for taxes paid to other states accurately. By understanding which income qualifies and following the state’s rules, taxpayers can maximize their tax benefits while remaining compliant with New Jersey tax laws.
For more information, taxpayers can refer to the full New Jersey Division of Taxation Technical Bulletin No. GIT-3B.
You can reach Martin D. Hauptman at mhauptman@mblawfirm.com or 973-243-7912.