State Reciprocal Tax Agreement: What it is and How it Works
If you’ve ever lived or worked in multiple states, you may have encountered the term “state reciprocal tax agreement” before. But what exactly does it mean and how does it affect you? In this article, we’ll break down the basics of state reciprocal tax agreements and explain how they work.
What is a State Reciprocal Tax Agreement?
A state reciprocal tax agreement is an agreement between two states that allows residents of one state to pay income tax only to their home state, even if they work in the other state. This means that if you live in State A and work in State B, you’ll only need to pay income tax to State A, as long as those two states have a reciprocal tax agreement in place.
Generally speaking, if you work in a state where you’re not a resident, you’ll need to file a nonresident tax return in that state and pay taxes on the income you earned there. However, if your home state has a reciprocal tax agreement with the state where you worked, you may not need to file a nonresident return or pay taxes to the other state.
How do State Reciprocal Tax Agreements Work?
Let’s use an example to illustrate how a state reciprocal tax agreement works in practice. Say you live in Pennsylvania and work in New Jersey. Pennsylvania and New Jersey have a reciprocal tax agreement in place, so you only need to pay income tax to Pennsylvania, your home state.
To take advantage of this agreement, you’ll need to fill out a form (typically called a certificate of nonresidence) and submit it to your employer. This form tells your employer that you’re a resident of Pennsylvania and that you’re covered by the reciprocal tax agreement with New Jersey. Your employer will then withhold Pennsylvania income tax from your paychecks, even though you work in New Jersey.
When it comes time to file your taxes, you’ll file a resident tax return with Pennsylvania, where you’ll report all of your income from the year, including the money you earned while working in New Jersey. Because of the reciprocal tax agreement, you won’t owe any additional taxes to New Jersey or need to file a nonresident return there.
Which States Have Reciprocal Tax Agreements?
Not all states have reciprocal tax agreements, and the agreements that do exist can vary in terms of which states they cover and what types of income are eligible. Some agreements cover only wages and salaries, while others also cover interest, dividends, and other types of income.
To find out whether your home state has a reciprocal tax agreement with a state where you work, you can check with your state’s tax agency or do a search online. Keep in mind that even if two states have a reciprocal tax agreement, you’ll still need to fill out the appropriate forms and provide them to your employer to take advantage of the agreement.
In Conclusion
A state reciprocal tax agreement can be a great benefit for people who live and work in different states. It means that you only need to pay income tax to your home state and can avoid filing nonresident returns and paying taxes to a state where you don’t reside. However, not all states have these agreements in place, and the rules for eligibility can vary. Be sure to check with your state’s tax agency or a tax professional to understand how a reciprocal tax agreement applies to your specific situation.