Reciprocal Income Tax Agreement: What You Need to Know
If you live and work in one state, but commute to work in another state, you may be subject to income tax in both states. However, there is a way to avoid being double-taxed: through a reciprocal income tax agreement.
What is a reciprocal income tax agreement?
A reciprocal income tax agreement, also known as a reciprocal agreement, is a pact between two states that allows residents of one state who work in the other to pay taxes only to their state of residence. This means that if you live in State A, but work in State B, you do not have to pay income tax to State B if a reciprocal agreement is in place.
How does it work?
Let`s say you live in Pennsylvania but work in New Jersey. Without a reciprocal agreement, you would have to file income tax returns in both states and pay taxes to both. However, if Pennsylvania and New Jersey have a reciprocal agreement in place, you would only have to pay taxes to Pennsylvania, your state of residence. Your employer would withhold Pennsylvania state income tax from your paycheck instead of New Jersey state income tax.
Which states have reciprocal agreements?
Currently, there are 17 states with reciprocal agreements:
– Illinois and Iowa
– Illinois and Kentucky
– Indiana and Kentucky
– Indiana and Michigan
– Indiana and Ohio
– Kansas and Missouri
– Maryland, Virginia, West Virginia, and Washington, D.C.
– Michigan and Wisconsin
– Minnesota and North Dakota
– Montana and North Dakota
– Montana and Wyoming
– New Jersey and Pennsylvania
– New Mexico and Colorado
– North Carolina and Virginia
– Oregon and Idaho
– Pennsylvania and Indiana
– Wisconsin and Illinois
It is important to note that the requirements and provisions of reciprocal agreements can vary by state.
What are the benefits of a reciprocal agreement?
The main benefit of a reciprocal agreement is that it prevents double taxation. Without a reciprocal agreement, individuals who work in a state other than their residence can be subject to income tax in both states. This not only results in a higher tax burden but can also make tax filing more complicated. Reciprocal agreements simplify the tax filing process for commuters and make it easier for employers to withhold and remit state income taxes.
In conclusion, if you are a resident of one state but work in another state, it is worth checking if a reciprocal income tax agreement is in place. This can save you from being double-taxed and simplify the tax filing process. However, it is important to keep in mind that the provisions and requirements of reciprocal agreements can vary by state, so it is always best to consult with a tax professional for guidance.