Benefits of Living in NJ While Working in NYC

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Living in New Jersey while working in New York City lowers taxes for most commuters, but the saving is narrower than it looks. You still pay New York State income tax on wages earned in New York. What you avoid is the New York City personal income tax, which applies only to city residents. New Jersey towns also levy no local income tax, and sales tax is lower. Other benefits are more house for the money, a car that is practical to own, and several transit routes into Manhattan. Higher property taxes and commuting costs offset part of the gain.

Where the tax saving comes from

New York City is one of the few large U.S. cities with its own personal income tax. It sits on top of New York State tax in graduated brackets that have run from about 3% to just under 3.9%, which on a middle or upper-middle income can mean thousands of dollars a year.

The city tax is a resident tax, charged at the same rate in all five boroughs: Manhattan, Brooklyn, Queens, the Bronx and Staten Island. Commuters who live elsewhere do not owe it. The city’s separate nonresident earnings tax on commuters was repealed by the state legislature in 1999.

New Jersey has no equivalent. Its municipalities, including Jersey City, Hoboken and Newark, do not tax residents’ income. Some New Jersey cities impose payroll taxes on employers, but those are paid by businesses, not withheld from your paycheck. Moving from Brooklyn to Jersey City therefore removes a whole tax layer.

How the two state returns fit together

Living in New Jersey and working in New York means filing two state returns:

1. A New York nonresident return (Form IT-203). New York taxes the portion of your income earned from New York sources, mainly wages for work performed in the state. The rate is figured on your total income, then applied to the New York share.
2. A New Jersey resident return (Form NJ-1040). New Jersey taxes residents on all of their income from every source, including the wages you earned in New York.

New Jersey then gives a credit for income taxes paid to other jurisdictions, claimed on Schedule NJ-COJ. The credit is limited to the smaller of two amounts: the tax you actually paid to New York on that income, or the New Jersey tax that the same income would generate. New York does not give you a credit. As the state where the work is done, it taxes first.

The result is that the income you earn in New York is taxed once, at the higher of the two states’ effective rates. If New York’s tax on those wages is higher, the credit wipes out the New Jersey tax on them. If New Jersey’s would be higher, you pay New York’s amount plus the difference to New Jersey.

Income unrelated to New York, such as interest, dividends or capital gains from a brokerage account, is generally taxed only by New Jersey as your home state.

Example 1: New York tax is higher

Hypothetical figures for illustration only, not actual tax rates. Dana lives in Hoboken and earns $100,000 in salary, all for work done in a Manhattan office. Suppose New York’s nonresident tax on that salary comes to $5,000 and New Jersey’s tax on the same salary would be $4,000.

• Dana pays $5,000 to New York.
• New Jersey computes $4,000 of tax, then allows a credit of $4,000 (the smaller of $5,000 and $4,000).
• Dana owes New Jersey $0 on the salary.

Total state tax: $5,000. Living in Brooklyn, she would pay New York State tax as a resident plus New York City tax on top. The city tax is the saving.

Example 2: New Jersey tax is higher

Hypothetical figures. Suppose instead that New York’s tax on Dana’s wages is $4,000 and New Jersey’s would be $4,500. New Jersey’s credit is capped at the $4,000 paid to New York, so Dana owes New Jersey $500, for a total of $4,500. She needs to plan for that $500 because her New York employer is not withholding it.

Example 3: Salary plus investment income

Hypothetical figures. Dana also earns $3,000 in dividends. New York does not tax a nonresident’s dividends. New Jersey taxes them in full, with no credit, because no other state taxed them.

Hybrid workers and the convenience rule

For hybrid workers, the split between office days and home days matters. Wages are ordinarily sourced to the state where you physically do the work, but New York applies a convenience of the employer rule: if you work from home in New Jersey for your own convenience rather than because your employer requires it, New York can treat those home days as New York workdays and tax that income too.

So a hybrid schedule does not automatically shrink your New York taxable income. If the home office exists because your employer needs it, for instance because no office space is available for your role, those days may be sourced to New Jersey. The outcome depends on the facts of your arrangement, so document your employer’s policy. Since 2023 New Jersey has also changed how it treats residents caught by other states’ convenience rules, which makes a preparer who regularly files both states’ returns worthwhile.

Other taxes that change when you move

Sales tax. New Jersey’s statewide rate is 6.625%, against New York City’s combined state and city rate of 8.875%. New Jersey also exempts most clothing and footwear, and certain Urban Enterprise Zones collect a reduced rate at participating businesses.

Property tax. This is the main offset. New Jersey’s property taxes are among the highest in the United States and fund local schools and services that income taxes cover elsewhere. Homeowners pay them directly, often a substantial bill in the suburbs; renters pay them through rent. Compare the property tax on a specific house with the city income tax you would avoid before assuming the move saves money.

Self-employment. Self-employed people who work in New York City may owe the Metropolitan Commuter Transportation Mobility Tax (MCTMT) on net earnings attributable to the MTA district, even as nonresidents. Moving to New Jersey avoids the city income tax but not this levy on New York-sourced self-employment earnings.

Housing, cars and the commute

Housing. In Manhattan even a small apartment can approach seven figures. New Jersey’s statewide average home value is less than half of that, although prices near the Hudson have climbed, so the same budget buys more square footage, a yard or an extra bedroom, especially in north and north-central New Jersey towns farther from the river.

Commuting. From northern New Jersey, Midtown is often 30 minutes to an hour away. Hoboken and Weehawken have ferries across the Hudson, NJ Transit trains run into Penn Station, PATH trains connect Jersey City and Hoboken to Lower Manhattan and Midtown, and commuter buses serve the Port Authority Bus Terminal. Driving can take an hour to two hours or more each way, plus Hudson crossing tolls and the congestion toll Manhattan charges vehicles entering its central business district. A commute from outer Queens or Brooklyn can take nearly as long by subway.

Car ownership. Keeping a car in New York City means paying for a garage, often hundreds of dollars a month, or hunting for scarce street parking. In most of New Jersey a driveway or apartment lot is free, which makes errands, school runs and weekend trips easier.

Lifestyle. New Jersey has 127 miles of Atlantic coastline, state parks with hiking trails, and some of the best views of the Manhattan skyline from the Palisades and the Hudson waterfront. Many towns offer a quieter, small-town feel within commuting range of the city.

Costs that reduce the benefit

The saving from skipping the city income tax shrinks once you add:

• Transit passes or tolls, which can run to several thousand dollars a year for daily commuters.
• Property taxes, paid directly by owners and passed through to renters.
• Car costs, if New Jersey living means owning a vehicle you would not need in the city.
• Time, which counts as a cost if the move adds an hour a day to your commute.

Getting the paperwork right

1. Update withholding. Tell your employer you now live in New Jersey so it withholds New York nonresident tax rather than resident state and city tax. If New Jersey’s tax on your wages may exceed New York’s, ask for New Jersey withholding as well or make New Jersey estimated payments. Your federal Form W-4 does not change for this.
2. File part-year returns in the move year. If you moved mid-year, you file part-year resident returns in both states, with city tax owed only for the months you lived in New York City.
3. Track workdays. Hybrid workers should keep a record of office days and home days, plus any written employer policy requiring home work.
4. Claim the credit. File the New York nonresident return first, then use its tax figure on New Jersey’s Schedule NJ-COJ.

FAQs

The Bottom Line

Commuters weighing a move from the five boroughs to New Jersey gain the most from dropping New York City income tax, lower sales tax and cheaper housing. High New Jersey property taxes, tolls, transit passes and car costs can erase much of that gain. Compare the property tax on a specific home with the city tax you would avoid, update withholding, and track office and home workdays.