I HATE LOOKING AT life through the lens of taxation. But at this time of year, it’s hard to avoid.
I’ve been doing my own taxes for more than four decades. But this year represents a new milestone in my tax return preparation career. We moved from Pennsylvania to New Jersey at the end of March 2021, so I’ve had to prepare 2021 tax returns for both states. Although I’d researched New Jersey’s tax code and made an estimate of what the differences would cost, I still had a few surprises.
Pennsylvania has a flat tax of 3.07% on most income. New Jersey has a graduated income tax with many brackets. The widest is the 6.37% tax on incomes from $150,000 to $500,000 for married couples filing a joint return.
Our Pennsylvania return will be based on the income we received while we were Pennsylvania residents from January through March, and the New Jersey return will be based on the income earned the rest of the year. That sounds simple, but there’s always a complication when it comes to taxes.
For example, most investment firms provide a single 1099-INT or 1099-DIV. I needed to go through our monthly statements to divide up the amounts earned while in Pennsylvania and New Jersey. I’ve used TurboTax for more than 20 years, and I’m quite comfortable with the software. TurboTax, however, doesn’t provide an easy way to divvy up a 1099-INT or 1099-DIV between states.
After hours of research, I found the best way to make an adjustment to the Pennsylvania 1099-INT was to debit the amount associated with New Jersey. Then, for the New Jersey return, I added a miscellaneous unearned income item, labeling it appropriately.
TurboTax usually handles the transition from my federal return to my state return fairly well. The addition of a second state return was not seamless, however. I had to manually input a lot of information.
One reason is the difference the two states have in their treatment of retirement income. Neither state taxes Social Security. Pennsylvania doesn’t tax other retirement income, such as pensions or retirement plan withdrawals. But New Jersey does if your total income exceeds $150,000.
In our case, my wife worked through July, then retired. Shortly thereafter, we rolled her company 401(k) into her Vanguard IRA. Knowing we were planning a major home renovation, she withdrew part of the balance. In Pennsylvania, that distribution wouldn’t have been taxed. But since we’d already moved, the distribution counted as New Jersey taxable income.
Another inequity is the taxation of capital gains. I sold some shares late in 2021. The vast majority of the gain occurred during the many years we were living in Pennsylvania, but I ended up owing taxes on the gain to New Jersey.
This will likely be the most complicated set of tax returns I’ll ever face. With time, I imagine I’ll get more comfortable with New Jersey tax laws and be better able to plan our future income to minimize taxes. I can’t help but wonder, though, if our legislators—at the state and federal levels—understand the complexity they’ve imposed on citizens trying to fulfill their civic duty.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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I will put your last sentence on my tombstone. Great article. Very happy the the Federal standard deduction was increased, no reason to keep so many receipts anymore. You are welcome down in Florida. The heat, humidity, and just plain crazy aren’t for everyone, but the income tax forms are awesome. I have enough troubles with the peculiarities of federal income taxes. Good luck to everyone come April 18th!
” I can’t help but wonder, though, if our legislators—at the state and federal levels—understand the complexity they’ve imposed on citizens trying to fulfill their civic duty.”
It’s possible that state legislators appreciate the complexity of taxes for their state’s taxpayers. It is unlikely they know or care about complexity for individual taxpayers who depart their state – other than to ensure that income earned in their state is taxed and their state’s tax credits do not benefit taxpayers in other states.
Some legislators are aware of the benefits of multi-state uniformity for businesses operating in more than one state.
Ohio is one of a few states that taxes individual and business income at the municipal level, in addition to state income taxes. The over 400 municipalities in Ohio who tax income each have their own city tax ordinances and tax rates, most requiring separately filed city tax returns. If you live in one city and work at locations in two others, you may have 3 separate city tax returns to file, in addition to state and federal returns.
I was just saying to my husband the other day that I can do our taxes (I use the H&R Block software) because I’ve kept our finances simple, but that’s going to change in the coming years when we start doing Roth conversions and then RMDs. I may have to cave and let a pro do it.
(The funny thing is that my husband is a tax attorney, but I do our taxes. He specializes in business taxes in the state of California. No state or federal income tax.)
We moved FL to PA in 2020. Although I let FreeTaxUSA do my state return, it didn’t seem complicated. What I found when I filed a full year of being a PA resident in 2021, it’s actually a pretty good state for retirees.
“In Pennsylvania, that distribution wouldn’t have been taxed. But since we’d already moved, the distribution counted as New Jersey taxable income.”
So you were taxed twice on your money. PA taxes on the contribution and NJ on the distribution. So sorry.
Great point.
When I moved from Ohio-with an income tax- to Texas-no income tax- to work from home I stopped doing my own tax returns and outsourced to a CPA. It was too hard and I wanted a fall guy if the returns were wrong.
I became a Connecticut resident on January 1, 2017. On Jan 2, I went down to motor vehicles and registered my car and got a new license, and then I went to the town hall and registered to vote.
There is a lot to be said for a clean, well-documented move from state to state.
This is the first time I’ve heard of someone moving TO New Jersey!
Hey, my family has lived in NJ since 1840 and I still do. It’s a lot more than the turnpike. 😎
A lot of cool people live in New Jersey! Jon Stewart, Bruce Springsteen…
We lived in NJ for a few years when I was a small child, and my sister was born there.