403(b) contributions not exempt from income tax in NJ: What if one works in NJ but lives in another state?

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nineth_dwarf
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403(b) contributions not exempt from income tax in NJ: What if one works in NJ but lives in another state?

Post by nineth_dwarf »

I am trying to understand the effect of the special treatment of pre-tax 403(b) contributions by NJ. New Jersey taxes my contributions to my 403(b), while those same contributions are pre-tax at the federal level and in most other states.

I am wondering what happens of this if :

(a) Taxpayer works in NJ and contributes through work to a 403(b). Those contributions are exempt from income tax at the fed level, but not from NJ income tax.
(b) Taxpayer lives in a state (say, NY), that has higher taxes than NJ and does not tax 403(b) contributions.

During tax filing, the state of residency (say, NY) accepts a tax credit of the amount of taxes paid to the state of the employer, NJ. Assume that the income tax is always higher in the state of residency (say, NY), so the person always pays some additional tax-dollars to NY (in addition to the NJ tax credit).

My assessment is that in the imaginary situation where the 403(b) contributions were exempt from NJ income tax, then the taxpayer would pay lower taxes to NJ, consequently would obtain a smaller tax credit on his NY (state of residency) tax return, and would pay additional tax-dollars to NY to compensate the smaller tax credit. But all-in-all, the sum of the taxes paid to NJ and NY would stay the same: for employees in NJ residing in another state with higher taxes, the special treatment of NJ towards 403(b) contributions does not matter. Is my understanding correct?
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