U.S. State Income Tax on Foreign Individuals

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U.S. State Income Tax on Foreign Individuals

For foreign individuals living or working in any specific U.S. state, it is important to understand that state’s rules to avoid double taxation or unexpected state tax liabilities. Strategic planning can also mitigate unexpected state-level taxes when relocating or visiting a new state.  

Let us understand the residence rule in New Jersey. New Jersey’s definition of a “resident” for state income tax purposes is different from federal tax residency rules. Your immigration status or whether you are treated as a U.S. resident or non-resident for federal tax purposes generally does not determine your residency status in New Jersey.

Instead, factors such as domicile, permanent home, and the number of days you spend in the state during the tax year are used by New Jersey to calculate residency.

Let’s review key terms, such as domicile and permanent home, used to determine residency in New Jersey.

Domicile refers to the place and state you consider your permanent home. It is generally the place where you intend to return after a period of absence. For example, you may return to New Jersey after vacationing abroad.

Permanent Home refers to a residence that you maintain permanently as your main home, whether you own it or rent it out. For example, you may rent an apartment in New Jersey with the intention of keeping it as your primary residence.

Next, we will examine the different types of residency in New Jersey.

An individual may qualify as a full-year resident in New Jersey if they meet specific residency requirements. Let’s understand them, which are as follows:

Condition 1:

If you have:

  1. Domicile in New Jersey,

and

  1. Permanent Home in New Jersey.

If you meet the above conditions, then you will likely be treated as a full-year resident.

Condition 2:

If you have:

  1. Domicile in New Jersey, but
  2. No Permanent Home in New Jersey.
  3. No Permanent home outside of New Jersey.

If you meet the above conditions, then you will likely be treated as a full-year resident.

Condition 3:

If you have:

  1. Domicile in New Jersey, but
  2. No Permanent Home in New Jersey
  3. Permanent home outside of New Jersey
  4. You spend more than 30 days in New Jersey

If you meet the above conditions, then you will likely be treated as a full-year resident.

Condition 4:

If you have:

  1. No Domicile in New Jersey, but
  2. Permanent Home in New Jersey and,
  3. You spend more than 183 days in New Jersey

If you meet the above conditions, then you will likely be treated as a full-year resident.

Example:

Sam is a Spanish Citizen. He moved to New Jersey from Spain on April 1 to start his U.S. work. He does not have a domicile in New Jersey. He rents an apartment in NJ and lives there through December 31. So, Sam spent 9 months in New Jersey, which is more than 183 days, and maintained a permanent home by renting an apartment there. In that case, Sam may be considered a full-time resident in New Jersey.

Tax treatment:

Full-year residents are subject to tax on their income from all sources, whether the income is from inside or outside New Jersey. Therefore, they should report their worldwide income on Form NJ-1040 (New Jersey Income Tax-Resident Return) to report their state income tax. This is subject to meeting filing thresholds requirements as per your filing status.

You are likely a part-year resident if:

  1. You changed domicile by either moving in or out of New Jersey and
  2. You meet the residency or nonresidence requirements for only part of the year.

A Part-year resident is simply someone who meets the resident definition for only part of the tax year. This may occur if they moved into or out of New Jersey and changed domicile and other residency requirements mid-year. For the remainder of the year, you are treated as a nonresident or part-year nonresident.

Therefore, you should check the residency requirements outlined under Full-year residents to determine which part of the year you were a New Jersey resident.

Example:

Alex is a Spanish citizen. He moved to New Jersey on August 1 and rented an apartment that became his permanent home. He intends to stay long term.

Further, Alex changed his domicile to New Jersey. He maintained his permanent home there and lived in New Jersey for more than 30 days during the year. In that case, He is considered a resident of New Jersey from August through December.

Therefore, Alex is treated as a part-year resident of New Jersey. He will likely file the resident return Form NJ-1040 and report his residency dates as August 1 through December 31.

For the other part of the year, when he did not move to New Jersey, he may be considered a non-resident. If he did not earn any New Jersey income before moving, he does not need to file a separate non-resident return.

Tax treatment:

Part-year residents report all income received from New Jersey while being a resident during part of the year. In this case, you will report it under your Resident return Form NJ-1040.

You may also receive income from New Jersey sources while being a non-resident during the other part of the year. In that case, you may report such income on your Non-resident return Form NJ-1040 NR.

You are considered a non-resident if you do not meet the definition of a full-year or part-year resident, as outlined above. This is likely possible in the following ways:
Condition 1:
If you have:
  1. No Domicile in New Jersey, and
  2. No Permanent Home in New Jersey
If you meet the above conditions, then you will likely be treated as a non-resident.
Condition 2:
If you have:
  1. No Domicile in New Jersey, but
  2. Permanent Home in New Jersey
  3. You spend less than 183 days in New Jersey
If you meet the above conditions, then you will likely be treated as a non-resident.
Condition 3:
If you have:
  1. No Domicile in New Jersey, but
  2. Permanent Home in New Jersey
  3. Permanent Home outside New Jersey
  4. You spend less than 30 days in New Jersey
If you meet the above conditions, then you will likely be treated as a non-resident.
Tax treatment:
Non-residents are taxed only on income from New Jersey sources, such as wages earned, business income, or rental income within the state. In that case, you may report such income on your Non-resident return Form NJ-1040 NR. Residency Tests Comparison in New Jersey New Jersey Residency Comparison Table
Status Condition # Domicile in NJ? Permanent Home in NJ? Perm. Home Outside NJ? Days in NJ Tax Return Form Tax Scope
FULL-YEAR RESIDENT — Taxed on worldwide income
Full-Year Resident Condition 1 Yes Yes (in NJ) N/A No limit NJ-1040 Worldwide income
Full-Year Resident Condition 2 Yes None in NJ None outside NJ No No limit NJ-1040 Worldwide income
Full-Year Resident Condition 3 Yes None in NJ Yes > 30 days NJ-1040 Worldwide income
Full-Year Resident Condition 4 No Yes (in NJ) N/A > 183 days NJ-1040 Worldwide income
PART-YEAR RESIDENT — Taxed on NJ income (resident period) + NJ-source income (non-resident period)
Part-Year Resident Condition 1 Yes, for part of the year Yes, for part of the year No > 30 days NJ-1040 & NJ-1040NR NJ income while resident + NJ-source income while non-resident
NON-RESIDENT — Taxed only on NJ-source income
Non-Resident Condition 1 No None in NJ N/A Any NJ-1040NR NJ-source income only
Non-Resident Condition 2 No Yes (in NJ) N/A <= 183 days NJ-1040NR NJ-source income only
Non-Resident Condition 3 No Yes (in NJ) Yes < 30 days NJ-1040NR NJ-source income only
International Aspect of Residency Rule in New Jersey It is quite common for foreign residents to operate a business in New Jersey without being physically present in New Jersey. Next, let’s examine some international aspects of New Jersey’s residency rules. Taxation of a Foreign Partner owning a Partnership/LLC in New Jersey There are times when a partnership or LLC is formed in New Jersey, but one of the partners resides outside the United States. If a partnership or LLC is formed or operates in New Jersey, its income from New Jersey business activity remains subject to New Jersey tax, regardless of where the partners or members reside. A partner or member who resides outside the United States is generally treated as a non-resident of New Jersey for state tax purposes. As a non-resident, that individual is taxed only on income derived from New Jersey sources, which includes their distributive share of the partnership’s or LLC’s New Jersey-sourced income. The partnership is required to pay a “non-resident partner tax” on behalf of any non-resident who has New Jersey source income. The partnership issues a Schedule NJK-1 showing the partner’s share and the tax already paid on their behalf. The foreign partner is generally required to file a New Jersey non-resident return Form NJ-1040NR if their total New Jersey-source income exceeds the filing threshold. They may attach the NJK-1 to claim a credit for the tax the partnership paid on the partner’s behalf. Can a resident of Florida be taxed in New Jersey for owning a Law firm PC in New Jersey? A Florida resident owning a New Jersey Professional Corporation (PC), such as a law firm PC, will likely have New Jersey state tax obligations. The obligations fall into two main categories: those for the PC itself and those for the Florida resident personally as the owner/shareholder. A Florida resident who operates the law firm without being physically present in New Jersey will likely be treated as a non-resident. New Jersey taxes non-residents on their NJ-sourced income. So, the Florida resident is required to file Form NJ-1040NR if their NJ-sourced income from the PC exceeds the threshold.

Do you need guidance on U.S. and International Tax Matters?