What Is Reciprocity for State Income Tax?
Definition and Examples of Reciprocity for State Income Tax
Reciprocity indicates an agreement between two or more states that they will exempt from taxation the earned incomes of workers who work in one state but live in another. These agreements make it possible for residents of one state to work across state lines and pay income taxes only to their states of residence.
You can file an exemption certificate with your employer to avoid paying income tax there if you work there but live in a reciprocal state. Taxes won't be withheld from your pay, but this doesn't mean that you're not liable for any state income tax. Your employer should withhold your home state taxes instead because you'll still owe them.
Here's what you need to know if you work in one state and live in another.
What Is Reciprocity?
Reciprocity is an agreement between states that prevents workers from having state taxes withheld twice from their pay—once in the state in which they live and again for the state in which they work.
However, even if you aren't covered by a reciprocity agreement, you still won't have to pay taxes to two different jurisdictions. A Supreme Court ruling prevents employees from having to pay state and local income taxes to two jurisdictions. Still, for the average worker, a reciprocal agreement simplifies the process of sorting out which state is owed what taxes.
Reciprocal agreements usually cover only earned income—wages, salary, tips, and commissions. They generally don't apply to other sources of income, such as interest, lottery winnings, capital gains, or any money that's not earned through employment.
Reciprocity has no effect on federal taxation or tax withholdings that are paid to the Internal Revenue Service (IRS). The IRS doesn't care what state you live in or the jurisdiction in which you earn your income—if it was earned in the U.S., the IRS wants its share.
- Alternate name: Reciprocal agreement
How Reciprocity Works
You would file a Virginia income tax return at the end of the year if you live there but work in Washington D.C, for example. You would not have to file one in D.C. because D.C. has reciprocity with all other states. You would not have to file two separate tax returns as you would if the two jurisdictions didn't have reciprocity.
Some states might require that you make estimated tax payments to your home state on your own. Your employer won't withhold any taxes for other states and forward them to that state, even if they have reciprocity, but you're still responsible for making sure your home state gets paid.
Actual taxation by two states is prohibited by the 2015 Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne et ux.
Simply filing a tax return doesn't necessarily mean that your income will be taxed. You can do so to claim a refund of taxes that were wrongfully withheld. For example, if you live in Illinois and work in another state with whom it has a reciprocal agreement, you would have to file a tax return from your employer's state to get that money back if your employer mistakenly withheld any taxes from your paycheck.
States With Reciprocity
Check the map below to learn about the reciprocity agreements between states. Living in any of the states covered by a reciprocal agreement means taxes won't be withheld from your paycheck by default—in other words, you shouldn't have to file a tax return in your work state to get back any taxes wrongly withheld from you.
Requirements for Reciprocity
Employees who want to claim an exemption from taxation in their work state must provide their employers with notice, usually by submitting a specific form. You must typically file your work state's exemption certificate with your employer.
Your human resources department should be able to tell you what form you need and it might even be able to provide you with one. You can also go to the website of the state's taxing authority and download one.
Do I Need to Pay Taxes Twice?
The Maryland v. Wynne Supreme Court decision applies to all states, not just to Maryland, although Maryland initially brought the suit. The Court ruled in a 5-4 decision that no two jurisdictions can tax the same income, so you should not have to pay income taxes to your work state and to your home state as well, even if they don't have reciprocal agreements in place.
A reciprocal agreement only provides that taxes for your work state won't be withheld from your earnings, but you can't be taxed twice even if they are.
Most states have adjusted for this decision by offering tax credits in the amount of whatever you paid to your work state. But you'll have to file tax returns to claim the credits each year.
Small employers might not be aware of this rule. Contact the Department of Revenue or the comptroller for the state in which you're working if your employer is unsure or insists on withholding taxes from your pay.
- Reciprocity means that only your home state will withhold tax from your paychecks if you live and work in separate states.
- Your home state and your work state must have an agreement in place between them not to withhold taxes for any state other than the one you live in.
- Just because taxes are withheld doesn't mean that you owe them—a 2015 Supreme Court decision ruled that you’re entitled to a tax credit or refund if two states withhold taxes from your pay.
- Claiming an exemption from withholding usually involves providing your employer with a state-issued certificate, but these certificates are available online.