Differences between New York and New Jersey State Income Taxes

Despite being bordering states, New York and New Jersey have significant differences in state income taxes. This article will highlight a few of these key differences.

Itemized Deductions and Add‑on Deductions

New Jersey

New Jersey does not allow federal‑style itemized deductions on its state return, but it offers several targeted deductions and exemptions instead. Key features include:​

• Property tax deduction up to $15,000 for New Jersey homeowners, or 18% of annual rent treated as property taxes for renters.
• Medical expenses are deductible to the extent they exceed 2% of a taxpayer’s New Jersey gross income.​
• No deduction for mortgage interest or charitable contributions at the state level.​

New York

New York allows itemized deductions, but layers on several income‑based limitations that significantly reduce their value at higher income levels. In addition, New York retains an overall “Pease‑style” limitation that phases down itemized deductions for higher‑income taxpayers.​

• Moderate‑income taxpayers can still benefit meaningfully from itemized deductions.
• As income climbs into higher brackets, the state progressively trims itemized deductions and caps their value, especially for very high earners.

For high‑income households, New York’s limited and phased‑out itemized deductions can make the state effectively less friendly than it appears from the rate table alone.

Retirement Contributions

New York

New York generally conforms to federal rules for pre‑tax retirement contributions. That means contributions to:​

• 401(k), 403(b), 457, Thrift Savings Plan (TSP)
• Traditional IRA (subject to federal rules)
• Health Savings Accounts (HSA) and many pre‑tax cafeteria plan benefits are treated similarly for state and federal purposes (i.e., pre‑tax at both levels, subject to federal eligibility limits).

New Jersey

New Jersey takes a much narrower approach.

• New Jersey allows pre‑tax treatment for limited employer‑sponsored plans, such as 401(k)s, but does not fully conform to federal pre‑tax rules for many other plans.​
• Contributions to IRAs, many 403(b)/457‑type plans, HSAs/FSAs, SIMPLE and SEP IRAs, and similar plans are often not deductible for New Jersey gross income tax purposes. The treatment of these contributions for New Jersey tax purposes is nearly identical to the treatment of after-tax dollars for Federal tax purposes.

In effect, New Jersey may tax income today that federal law (and New York) allows you to defer, which can materially change the benefit of retirement savings strategies if you live and work in New Jersey.

Tax Rates and Local Income Taxes

New York “Quasi-progressive” Structure & Local Tax

• New York’s “quasi‑progressive” system means that, at certain income levels, income that would typically fall into lower brackets will effectively be subject to tax at your marginal rate because of tax computation worksheets made to recapture taxes.
• For high‑earning NYC residents, the combined NY and NYC rates will often exceed the New Jersey state rate, even though New Jersey ramps up a bit faster at moderate incomes.

Key Tax Rate Considerations for High Earners

Retirement Withdrawals and Social Security

New York

• Each filer age 59½ or older can exclude up to $20,000 of qualifying pension and annuity income (including many IRA and 401(k) withdrawals) from New York taxable income.​
• Married couples filing jointly cannot pool this; instead, each spouse gets their own $20,000 exclusion if each has qualifying income.

New Jersey

New Jersey offers a larger exclusion for qualifying retirees (62+ or those with a disability), but it is subject to an income cap:

• Maximum exclusion: up to $75,000 for Single and $100,000 for MFJ.
• Complete exclusion if total income is at or below $100,000.
• Partial exclusion if total income is between $100,001 and $150,000, with the percentage depending on filing status and income band.
• Above $150,000 of total income, the exclusion is removed, and all retirement income becomes fully taxable at regular state rates.​

In both states, Social Security benefits are not taxed for state purposes, which is a meaningful advantage relative to some other states.​

Capital Loss Carryovers

• Federal and New York: Net capital losses that exceed current‑year limits can be carried forward to future years until used.​
• New Jersey: Net capital losses cannot carry forward to a future tax year; any unused loss at year-end is lost for New Jersey tax purposes. There are expectations for capital losses incurred through a partnership or other passthrough vehicle, as some carryforward is allowed in that case.

New York tax rates range from 4.00%-10.90%, with a big jump from 6.85% to 9.65% at $1.08M S/$2.16M MFJ. New Jersey tax rates range from 1.40%-10.75%, with a big jump from 6.37% to 8.97% at $500k S & MFJ. Although they both have similar top marginal rates, New Jersey has lower tax rates at lower income thresholds. However, New Jersey scales up to the ~9% marginal tax rate at a much lower income threshold than New York. New Jersey has a progressive tax system, which means you pay a specific tax rate only for the portion of income in the bracket. New York, on the other hand, has a quasi-progressive income tax system. At certain income levels, income in lower tax brackets is actually taxed at one’s higher marginal tax rate through a special recapture tax. Furthermore, residents of New York City will have to pay an additional 3.88% in local income taxes.

Qualified Opportunity Zone (QOZ) funds

• At the federal level, QOZ investments allow deferral (and potential reduction) of certain capital gains.
• New Jersey follows this treatment and allows a similar deferral at the state level.​
• New York decoupled from federal QOZ deferral beginning in 2021; capital gains invested in QOZ funds generally must still be recognized immediately for New York state income tax purposes.​

For investors using QOZ strategies, the split treatment can create a mismatch between federal and New Jersey/New York taxation.

529 Contributions

• New York allows a deduction of up to $5,000 for Single and $10,000 for MFJ for contributions to qualifying 529 plans, with no income cap.​
• New Jersey offers a larger deduction—up to $10,000 for Single and $20,000 for MFJ—but only for taxpayers with gross income below $200,000. The income threshold is a cliff; once you exceed the limit, the deduction disappears entirely.

Treasury and Municipal Bond Funds

• Interest from direct U.S. Treasury obligations is exempt from state income tax in both New York and New Jersey.​
• For mutual funds or ETFs holding Treasuries:
  • New York requires that at least 50% of the fund’s assets be invested in U.S. Treasuries for the Treasury‑interest portion to receive tax-exempt treatment for New York tax purposes.​
  • New Jersey does not impose the same strict percentage threshold.
• State‑specific municipal bond funds (New York or New Jersey muni funds) generally provide state‑tax‑free interest for residents on the portion invested in that state’s obligations.​

Putting it Together for State Tax Planning

There are many differences, and no clear winner emerges in determining which state is best for tax optimization. Instead, it is essential to calculate for your specific tax situation and be mindful of any relevant bend points in your state of residence.

• Your income level and whether you expect to be in mid‑ or high‑six‑figure (or seven‑figure) ranges.
• The mix of your income: salary vs. retirement withdrawals vs. capital gains vs. interest/dividends.
• How heavily you use itemized deductions, especially mortgage interest and charitable giving.
• Whether you expect to realize significant capital losses or use QOZ investments.
• Your age, retirement timing, and how much of your income will be eligible for New York’s or New Jersey’s retirement exclusions.

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Astra Wealth Partners LLC is a registered investment adviser registered with the United States Securities and Exchange Commission.

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