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Refundable Gross Income Tax Credit for ³Ô¹ÏºÚÁÏ Residents Who Successfully Challenge Another State’s Imposition of the Convenience of the Employer Rule

P.L. 2023, c.125 establishes a Gross Income Tax credit for ³Ô¹ÏºÚÁÏ residents who successfully win their own legal challenge to the taxing of their income by another state when the income is earned while they are located physically in ³Ô¹ÏºÚÁÏ. 

The credit provided under the new legislation applies to Tax Years 2020-2023.

In order to qualify for the credit, the taxpayer must:

1. Be a ³Ô¹ÏºÚÁÏ resident;
2. Pay income tax or wage tax to another state;
3. Apply for and be denied a refund from the other state on income earned while working remotely (e.g., from home) in ³Ô¹ÏºÚÁÏ;
4. File an appeal of the other state’s tax assessment in an out-of-state tax court or tribunal;
5. Obtain a final judgment in their favor from that tax court or tribunal; and
6. Receive a refund from the other state as a result.

The final judgment in the taxpayer’s favor from the other state’s tax court or tribunal must also satisfy the other state’s laws for establishing finality. This includes a New York State Order of Discontinuance issued by their Division of Tax Appeals and a corresponding Joint Stipulation of Discontinuance to verify that a final judgment was obtained by the taxpayer.

The refund from the other state requires an adjustment to ³Ô¹ÏºÚÁÏ’s credit for taxes paid to another state and will likely result in additional tax due to ³Ô¹ÏºÚÁÏ. However, the credit provided under the new legislation allows a credit of 50% of the additional tax that is owed to ³Ô¹ÏºÚÁÏ. This credit is refundable, meaning the resident can receive the full value, even if the credit reduces ³Ô¹ÏºÚÁÏ taxes to below zero.

To receive the credit, the taxpayer must submit a copy of the final judgment from the other state’s tax court or tribunal with an amended NJ-1040 reducing the credit for taxes paid to another state. In addition, the taxpayer may include a request for a waiver/abatement of interest and penalties, which the Division will consider and grant on a case-by-case basis.

Taxpayers should submit all of the above to the ³Ô¹ÏºÚÁÏ Division of Taxation, Gross Income Tax Audit Branch, PO Box 288, Trenton, NJ 08695-0288, attention: Chief.