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Division of Taxation

Refundable Gross Income Tax Credit for New Jersey 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 New Jersey 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 New Jersey. 

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 New Jersey 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 New Jersey;
  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 New Jersey’s credit for taxes paid to another state and will likely result in additional tax due to New Jersey. However, the credit provided under the new legislation allows a credit of 50% of the additional tax that is owed to New Jersey. This credit is refundable, meaning the resident can receive the full value, even if the credit reduces New Jersey 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 New Jersey Division of Taxation, Gross Income Tax Audit Branch, PO Box 288, Trenton, NJ 08695-0288, attention: Chief.

Last Updated: Monday, 12/04/23