A Taxing Move
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 3.01% 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.
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 3.01% 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.The post A Taxing Move appeared first on HumbleDollar.
No comments have been added yet.
