State Tax Reciprocal Agreements (aka "Reciprocity") – Part II
We all know that states like to do things their own way. It’s what makes the United States so…interesting. Reciprocal rules are no exception. In some reciprocal states, you just mark a checkbox on your return, fill in a few lines, and you’re done. In other states, well…
Say you live in New Jersey but work in Pennsylvania, two states that do have reciprocity. But every year, you end up filing a nonresident Pennsylvania return plus a resident New Jersey return. If these two states have reciprocity, then why do you have to keep filing a Pennsylvania nonresident return in addition to your New Jersey return? What’s going on?
First of all, Pennsylvania reciprocity rules specify that to avoid filing a nonresident return, you need to submit Form REV-420 to your employer, which requests NJ withholding instead of PA withholding. Second, your employer needs to grant your request. If and only if both conditions are met, your Pennsylvania employer will withhold New Jersey tax instead of Pennsylvania tax (and you’ll see the NJ instead of a PA in Box 15 of your Form W-2).
Otherwise, your employer is required by law to continue withholding Pennsylvania tax, which means you’ll continue filing returns in both states. So you see, reciprocity often comes with conditions; it isn’t always automatically granted.
"Then what’s the point?" you might ask. Well, Pennsylvania reciprocity rules allow in-state employers to withhold the appropriate state tax for residents of reciprocal states – that is, for residents of Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia only. The employer can’t, for example, withhold California taxes for a California resident because the two states don’t have reciprocity.
Does my state have reciprocity?
Here are the states (current as of March 2006) that have reciprocity agreements.
- District of Columbia: Allows all nonresidents to exclude DC source income from taxation. However, only Maryland and Virginia have "true" reciprocity with the District of Columbia (that it, they allow DC residents to exclude MD and VA source income from taxation).
- Illinois: Iowa, Kentucky, Michigan, Wisconsin
- Indiana: Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
- Iowa: Illinois
- Kentucky: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
- Maryland: District of Columbia, Pennsylvania, Virginia, West Virginia
- Michigan: Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
- Minnesota: Michigan, North Dakota, Wisconsin
- Montana: North Dakota
- New Jersey: Pennsylvania
- North Dakota: Minnesota, Montana
- Ohio: Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
- Pennsylvania: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
- Virginia: District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
- West Virginia: Kentucky, Maryland, Ohio, Pennsylvania, Virginia
- Wisconsin: Illinois, Indiana, Kentucky, Michigan, Minnesota