I work in one state and live in another state. What do I file? (Part II)

Tax Tips

I work in one state and live in another state. What do I file?

In Part I, I touched upon the basic principles of income tax reciprocity between states using a fictitious example. In this installment, I will show how state reciprocity is handled for two states that have a reciprocal agreement.

We all know that states like to do things in 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 and work in Pennsylvania, two that do have reciprocity. But every year, you end up filing a nonresident Pennsylvania return plus a resident New Jersey return. This is because you earned Pennsylvania source income (your wages) and your home state of New Jersey requires you to report all of your income regardless of where you earned it.

If these two state have reciprocity, then why do you have to keep filing a Pennsylvania nonresident return and a 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 Pennsylvania employer. This form requests New Jersey state withholding to be taken from your wages, not Pennsylvania withholding.  Second, your Pennsylvania employer needs to grant your request. If and only if both conditions are met, can you only have state tax withheld from New Jersey and not from Pennsylvania. (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. This means that you will continue to file returns for both states. So you see that reciprocity often comes with conditions; it isn’t always automatically granted.

If, you are a resident in one of the states listed below and you are also filing a nonresident return in a reciprocal state, ask your payroll department  or your resident state tax board how you can eliminate the need to file 2 state tax returns.  Usually you just need to fill out a form.  After all, reciprocity is designed to make filing easier, not harder!

Here are the states (current as of March 2008) that have reciprocity agreements. The state in bold is your employer state.

  • District of Columbia: Allows all nonresidents to exclude DC source income from taxation. However, only Maryland and Virginia have “true” reciprocity with DC (that is, 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