Vishal:
If you LIVE in NJ and work in NYC, you will PAY taxes to NY state (but NOT NY City). Arrange to have NY state income taxes withheld from your salary. At the end of the year, you will have to file a NY state income tax return (Form IT-203 as a non-resident who is earning income within NY state borders). The NY state tax rate for your income level is about 6.85%.
You will also have to file a New Jersey tax return, but NJ will give you a credit for the taxes paid to NY state. Since NY state income tax rates are generally higher than NJ, that credit should completely offset any NJ state tax liability, resulting in ZERO NJ state tax liability.
For this reason, it makes no sense to have NJ state taxes withheld just to have them refunded in 2010. Now, that circumstance changes if your wife works in NJ. Let me know if that is the case.
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