new jersey tax vs. new york tax

April 26, 2006 2:00 PM

I live in NYC, I make $60k a year, and I take home about $750 per week, which comes to $39k. This strikes me as ridiculous. Am I not using some deduction that everyone else knows about? Would I pay fewer taxes if I kept my Manhattan job but lived in New Jersey?
posted by bingo to work & money (40 comments total)

You'd have to pay taxes in both states if you lived in one and worked in the other, although New York & New Jersey have a reciprocal tax agreement that GENERALLY means they just cancel one another out. When I lived in NJ and worked in NYC I sometimes had to pay one state $5-$10 in state taxes to make up the difference. So, basically, no savings.

When you did your taxes a few weeks ago, did you have to pay anything extra or did you get a refund? If you got a refund, you should speak to HR and get things adjusted--there's no point in letting Uncle Sam take more money from you each week than necessary.
posted by bcwinters at 2:06 PM on April 26, 2006

I didn't get a refund. I owe the government over a thousand dollars.
posted by bingo at 2:08 PM on April 26, 2006

I'm in Minnesota, but I've always used as a general rule of thumb that Fed and State income tax are going to be somewhere in the neighborhood of 30% for that tax bracket. By that totally crude calculation, your after-tax salary would be $42K. So, $39K is not that far off...

I've been getting close to $6K in tax refunds the past few years (that's a BAD thing; I have no interest in the Feds holding money that is mine. No interest, get it?). I remedied the matter by bumping my w-4 allowances from 2 to 9. 9 seems ridiculous, but that's how I'm going to pull in another $6K net in my paycheck.
posted by mcstayinskool at 2:12 PM on April 26, 2006

Living in NYC costs you about two grand extra just due to the city tax.
posted by smackfu at 2:12 PM on April 26, 2006

It sounds about right. US federal tax is about 25-28%. Then you have NY tax of about 7%. This isn't so bad, if you look at world income tax rates. However, if you got a refund last year, talk to your HR department.
posted by acoutu at 2:13 PM on April 26, 2006

Eh, that's about 34%, which seems about right. Taxes are a bitch, huh...
posted by SweetJesus at 2:14 PM on April 26, 2006

It's been a while since I lived in New York City, but my understanding is that living and working in New York City is the single most disadvantaged tax situation in the country. I'm not sure what to suggest, but does your employer offer things like healthcare spending accounts that take money out pre-tax for medical expenses, or offer a pre-tax savings plan? Those might help shelter at least a small part of your income from the various government entities that lay claim to your money.
posted by ambrosia at 2:16 PM on April 26, 2006

ambrosia: Yes, my employer offers a great 401k, but I want the money now, not when I retire.
posted by bingo at 2:21 PM on April 26, 2006

If you're accumulating any retirement savings, make sure you put them in a 401(k). This money is put into the account before federal taxes are deducted. When you eventually need it, you'll pay taxes on it, but probably at a lower rate since you won't have as much income during retirement.
posted by landtuna at 2:21 PM on April 26, 2006

Whoops. Should've previewed first!
posted by landtuna at 2:22 PM on April 26, 2006

About smackfu's comment: what's the solution? Is there somewhere in the NYC area that I could relocate to that would save me that two grand?

This is bullshit. I'm moving to Switzerland.
posted by bingo at 2:22 PM on April 26, 2006

NYC and Yonkers residents pay local income tax. As far as I can tell, no other cities/towns in the state charge residents this tax. (source: the state tax booklet instructions, or here).
posted by hsoltz at 2:35 PM on April 26, 2006

"You'd have to pay taxes in both states if you lived in one and worked in the other"

Unless something has radically changed, this is not correct. You pay taxes based on where you live, not where you work.
posted by bshort at 2:41 PM on April 26, 2006

Your situation seems about right. You probably also know that your tax dollars are going to subsidize Kentucky, Montana and all the other red states, whose residents live high on the government teat while simultaneously feeling put-upon by their awful tax burden.

bshort: NJ and NY have special tax rules, due to the high number of commuters who live in one and work in the other.
posted by jellicle at 2:46 PM on April 26, 2006

Bingo, by using your employer's 401K, the money will go in there pre-tax, and may cut your overall tax liability (i.e., your take-home pay may go up, or at least not go down as much as you think); same thing for an FSA (medical flexible spending account) - if your employer matches funds and you're in a position to vest in those matching funds, that free money (okay, later, not now - but still, FREE!), so that can take a little of the sting away. And remember the Miracle of Compounding Interest...
posted by dbmcd at 2:46 PM on April 26, 2006

When you did your taxes a few weeks ago, did you have to pay anything extra or did you get a refund? If you got a refund, you should speak to HR and get things adjusted--there's no point in letting Uncle Sam take more money from you each week than necessary.

Check out the IRS Withholding Calculator, this is the sort of thing it's made for.

Also, if you don't already, it's time to start making aggressive use of tax deductions. Do you use your computer for anything work-related? Your DSL/cable modem? Cell phone? And so on... It's kind a pain in the ass rounding up all of that information at tax time, but it can add up over the year.
posted by Brian James at 2:53 PM on April 26, 2006

"I want the money now, not when I retire."

You might want it now, but you'll need it when you retire. I hope you're putting something in that 401k.
posted by CrayDrygu at 2:54 PM on April 26, 2006

You could buy a house or have a kid if you just want to reduce federal taxes, but then you'd definitely take on more expenses. The only other way would be to determine how to jump tax brackets by disposing of some income pre-tax, but I'm not sure that necessarily works.
posted by mikeh at 2:54 PM on April 26, 2006

You pay taxes based on where you live, not where you work.

NYC has a non-resident income tax for people who work in but don't live in the city.
posted by TimeFactor at 2:55 PM on April 26, 2006

Form an S-Corp and call yourself a consultant. Get paid 1099 from now on, with a raise because youre not getting benefits or 1099 with benefits if you can manage that. Now deduct all your personal belongings as work related. Drove that car to work? Deduct.

There are tons of finance books on how to beat taxes or at least minimize that damage.
posted by skallas at 3:02 PM on April 26, 2006

CrayDrygu: I'm not saying I won't live to retirement age, but I expect my salary to be significantly higher in another year or so, and then it will make more sense for me to start putting aside. Right now I make just enough to buy decent clothes for work, pay rent for a tiny place, and chip away at my debts.

On the other hand, if, as mikeh and Brian James suggest, I could actually pay fewer taxes by contributing to the 401k now, then I'll have to look into that.

Forming a shell and doing some side work as a consultant is something I'm looking into. But I'm not sure how my employer would look on an announcement that I was going to be a consultant in my current position (or would it even matter to them, financially speaking?).
posted by bingo at 3:14 PM on April 26, 2006

You pay taxes based on where you live, not where you work.

don't know if the laws are different between NY/NJ, but out here in the hinterlands, people that live in Washington but work in Oregon most definitely pay Oregon state income tax...
posted by pdb at 3:27 PM on April 26, 2006

But pdb...isn't that because Washington has no state income tax?
posted by bingo at 3:29 PM on April 26, 2006

If you live in NY and work in CT you def pay taxes both places, but net out CT against NY.
posted by JPD at 3:35 PM on April 26, 2006

move to wyoming = no state income tax
posted by masymas at 4:07 PM on April 26, 2006

Form an S-Corp and call yourself a consultant. Get paid 1099 from now on, with a raise because youre not getting benefits or 1099 with benefits if you can manage that.

And then immediately give yourself a second big raise on top of that, because now you're paying self-employment tax too. Being 1099 costs a lot more than people imagine. See all those withholdings for FICA, Medicare, etc? Your employer matches those. Once you are the employer, you pay it all.

Also, don't count on your personal belongings becoming magically deductible just because you've become self-employed. Only the possessions that are genuinely for business, and only to the extent that they used for the business (90% of your mileage is personal? then 90% of the car expenses are non-deductible).

It's much easier to focus on maxing out deductions you're already eligible for, than to re-arrange your life in hopes of becoming eligible for others. If you're not yet making the maximum allowable retirement contrib every year, start there.
posted by nakedcodemonkey at 4:12 PM on April 26, 2006

"I expect my salary to be significantly higher in another year or so, and then it will make more sense for me to start putting aside..."

If you put aside just 10% of your income into the 401k, then in one year, you'll have $3900 in it. If your employer matches half your contribution, you'll have $5850. An investment calculator I found tells me that much money invested for 40 years with a 6% return will be worth nearly $60,000.

Of course, you'll need a lot more than that for retirement, when you consider inflation, the fact you'll have to pay taxes on that money, and the fact you'll need (hopefully, anyway) at least 10 years' worth of cash. But would you really turn down that much money?
posted by CrayDrygu at 4:29 PM on April 26, 2006

If you live in NJ and work in NY, you still pay NY state and NY city taxes, you just get to deduct them from your NJ income tax as credit paid to other districts. At least, that's the way it worked when I was doing so in the early 1990s.
posted by fings at 4:45 PM on April 26, 2006

that much money invested for 40 years with a 6% return will be worth nearly $60,000.

That's some funky math.
posted by dobbs at 4:46 PM on April 26, 2006

According to the tax software, as soon as you say 'yes' to that "did you make this money in new york city," there goes your return. It doesn't matter where you live.
posted by miniape at 4:58 PM on April 26, 2006

I could actually pay fewer taxes by contributing to the 401k now, then I'll have to look into that.

I hope you didn't misunderstand this as getting more take-home pay per period. By contributing to your 401k, less of your total income gets taxed because you've disposed of a portion of your income pre-tax. So that extra $100 put into the 401k gets sheltered from taxes but it's also taken out of your paycheck. Using this example, your take-home pay is now $650 per week ($750 - $100 contribution) and the $100 you've taken out goes into your 401k as $151 (no 34% taxes). "Free" money!

Unfortunately, your income is too high to get remotely close to moving down to the next tax bracket. Here's the '06 rate schedule for reference (look halfway down the page). Living in cities is expensive - you need to learn to minimize your monthly expenses. At the same time, put in as much into your 401k as you can afford, especially if your employer has matching. Tax-free contribution + Tax-free returns = Retirement win!

That's some funky math.
Worked fine here. $5,850 with 6% return over 40 years is $60,171.23
posted by junesix at 5:02 PM on April 26, 2006 [1 favorite]

CrayDrygu: Would I rather have $4,000 now than $60,000 in 40 years? Absolutely.

Another way of looking at it is that I can have that $4,000 now, when I have nothing but debt, and five years from now, when I'm making $100,000, I can start putting in 10% then. It will still come out to a decent amount of money in the end.

Is it possible that I actually won't be making $100,000 in five years, that somehow I'll accumulate more debt by then, or that I'll have a similar attitude and won't want to give up a piece of my larger salary either? Sure. But that will be too bad. We each have our own priorities.
posted by bingo at 5:17 PM on April 26, 2006

This is small compared to the tax advantages to a 401k, but make sure that you are taking advantage of any tax shelters on your insurance. We were just reminded today (open enrollment time) that we should check the box to take our health/dental/life/disability premiums out pre-tax, leaving us with less taxable income at the end of the day (but a few more bucks take-home, in many cases). If you have any reliable medical expenses (glasses, prescriptions, medical/dental costs not covered by insurance, some OTC medications like allergy, see your HR department), calculate your costs and start taking that stuff out pretax in a Flexible Spending Account for Medical Expenses at your next opportunity to do so.

You really ought to take the 401k with matching, that's free money. You have a certain amount of access to your principal for certain kinds of purchases. An IRA may give you even more access to the cash without penalties. Your bank may offer some free financial planning information for more details. IANAAccountant.
posted by Lyn Never at 5:25 PM on April 26, 2006

bingo, you put in a bit of money now because it gets compounded. Let's say you make a monthly contribution of $100 to your 401k. In 5 years with 6% return, that's a $6,982 head start on your retirement. Stretch that out another 35 years and it's $138,029. That's on top of what you would have earned if you started later when your salary hit $100,000.

What kind of debts do you have? If it's an interest free school loan, then your money is better spent accruing 6% return in a 401k than paying off an interest free loan. That $10,000 school loan is still $10,000 when you hit $100k salary. However, that $10,000 put into your 401k would be considerably more than $10,000 in the same amount of time. Of course, ideally you don't want a $10,000 loan sitting around so you should divide your money among payments on that debt and some contributions to your 401k. If we're talking about credit cards or other high-interest debt, then forget all of the above and pay that off ASAP.
posted by junesix at 5:47 PM on April 26, 2006

That's some funky math.

Let's make the calculations easy, and assume that a 6% APY is calculated thusly: At the end of every year, 6% of the balance is added to the balance. (It's more complicated than that, but this is a reasonable estimate.)

So get out your calculator, punch in:

5850 * 1.06

Now hit "=" 40 times, for 40 years. $60,171.45. Remember it's growing on an exponential curve, because you get to earn interest on interest paid.

Of course, that assumes you only contribute for one year. If you keep contributing every year for the next 40 years, even if your contributions never increase (meaning that every year you take your balance, add another $5850 to it, and multiply everything by 1.06) it gets even better.

You don't have to take my word for it, though. There's lots of investment calculators out there.
posted by CrayDrygu at 6:07 PM on April 26, 2006

junesix: My biggest debt is a school loan, but it's not interest-free, and it's for about $70,000. And with a slight increase in income, I won't even be able to deduct the interest on that loan, because I'll make too much money to qualify.
posted by bingo at 6:22 PM on April 26, 2006

I know a great accountant in NYC - one of the few reasons I still wish I lived there. Email me if you'd like his information.
posted by ikkyu2 at 6:41 PM on April 26, 2006

Are you itemizing your deductions, which allows you to deduct your state/local taxes from your federal return? That might save you some money vs. using the standard deduction.

I only know this because I've been told so by accountants; my real advice is to get an accountant. And do it now, not next April--they may be able to tell you a few things you can do for the remainder of this year (receipts to save, investments to make, keep a pied-a-terre in Jersey, etc.) to improve the outcome of next year's return.
posted by staggernation at 8:41 PM on April 26, 2006

I itemized, but I didn't include my state and local taxes in the itemizations. Also, the IRS Withholding Calculator tells me that I should get a huge refund with my current setup. So I guess the moral is that I'm out of my depth and I need an accountant, and/or to do some serious reading.
posted by bingo at 10:35 PM on April 26, 2006

Yeah, I can't help but think that you're missing a deduction here, probably for the local taxes you've paid (which do get deducted from your federal income). And it sounds like you should also get to reduce the NY/NJ taxes based on some sort of netting, though I don't know anything about this.

I have used TurboTax for the past 5 returns and it does all of this stuff really well, federal and state. There is also the Tax Cut program, which also gets good reviews. Either way, you'll spend less than $100 on the software to save a lot, it sounds like. The purchase of tax preparation software it itself deductible, too, which is cool.

You might consider going to an accountant, though, in order to re-file your past few years taxes if you have screwed them up. You have a few years to file corrected returns and get whatever refund was supposed to be yours.
posted by Mid at 11:32 AM on April 30, 2006