New Jersey and New York City have some of the highest tax rates in the country, so choosing between them can be like picking your poison. Overall, you probably pay less living in New Jersey, because New York City has several extra taxes. However, you cannot judge tax rates going by published figures.
Income Tax Rates
In 2011, New Jersey had an income tax rate that varied from 1.4 percent to 8.97 percent. The top tax bracket applied only to taxpayers earning at least $500,000 a year. New York had a state income tax that varied from 4 percent to 8.97 percent for people that made between $8,000 to $500,001 or more, according to the Federation of Tax Administrators. This does not include cities that charge income tax. New York City charges an income tax rate that brings the total effective top tax rate of NYC residents to 12.62 percent.
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The state of New York levies a 7 percent tax on most sales and New Jersey 4 percent. New York City adds to the sales tax, but New Jersey has no local sales tax. Combined local and state sales tax brings New York City's tax rate to an 8.625 percent, while New Jersey's rate lowers to an average of 6.95 percent. New York and New Jersey exempt food and medical drugs from sales taxes.
As long as you do not live in New York City, you do not have to pay New York City's income tax, unless you are an employee of New York City. Also, you cannot avoid NYC income taxes by living in New Jersey. For instance, using a summer home in New Jersey to claim residency there would be considered tax evasion. If someone reports this, you could face penalties and owe back taxes.
If you are deciding to live in New Jersey or NYC to get the lowest tax rate, talk to an accountant about how your tax situation might actually look at the end of the year. Exemptions and deductions might make their tax rates comparable. For instance, you can deduct state and local taxes on your federal tax return, assuming all of that is federally taxable. Also, you might pay commuters tax if you live in New York City.