What is Reciprocity for State Income Tax?

How Do You Pay State Taxes If You Live in Virginia But Work in D.C.?

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If you live in Virginia and work in D.C., does this mean you have to pay income tax to both? Not if the jurisdictions have a reciprocal tax agreement in place -- and they do. Reciprocity means that two states have agreed to exempt from taxation the earned incomes of workers who live in the other state. These reciprocal agreements make it possible for residents of one state to work across state lines and pay income taxes only to their states of residence.

The agreements are most common between neighboring states. 

Living in Virginia and Working in D.C.

If you live in Virginia and work in D.C., you can file an exemption certificate with your employer in D.C. to avoid paying income tax there. D.C. taxes will not be withheld from your paycheck, but this doesn't mean you don't have to pay state income tax. Your employer will withhold Virginia taxes instead. You would file then a Virginia income tax return at the end of the year. You would not have to file two separate tax returns, one with each state, as you would have to do if the two jurisdictions did not have a reciprocal agreement. 

Other states may require that you make estimated tax payments to your home state on your own. Your employer will not withhold any states taxes, but you're still responsible for making sure your home state gets paid. 

Which States Have Reciprocity?

The following states have reciprocity with one or more other states as of 2016:

  • Arkansas -- Some border cities only 
  • District of Columbia -- Reciprocity with all other states 
  • Illinois -- Reciprocity with Iowa, Kentucky, Michigan and Wisconsin
  • Indiana -- Reciprocity with Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin 
  • Iowa -- Reciprocity with Illinois
  • Kentucky -- Reciprocity with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin
  • Maryland -- Reciprocity with the District of Columbia, Pennsylvania, Virginia and West Virginia 
  • Michigan -- Reciprocity with Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin
  • Minnesota -- Reciprocity with Michigan and North Dakota
  • Montana -- Reciprocity with North Dakota
  • New Jersey -- Reciprocity with Pennsylvania 
  • North Dakota -- Reciprocity with Minnesota and Montana
  • Ohio -- Reciprocity with Indiana, Kentucky, Michigan, Pennsylvania and West Virginia
  • Pennsylvania -- Reciprocity with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia
  • Virginia -- Reciprocity with the District of Columbia, Kentucky, Maryland, Pennsylvania and West Virginia
  • West Virginia -- Reciprocity with Kentucky, Maryland, Ohio, Pennsylvania and Virginia
  • Wisconsin -- Reciprocity with Illinois, Indiana, Kentucky and Michigan

If you work in any of these states but reside elsewhere, ask your employer about a possible reciprocal agreement with the state where you live. Very small employers may not be aware of this provision, so if your employer is unsure, contact the Department of Revenue or the Comptroller for the state in which you're working. 

Reciprocal Agreements Don’t Cover Everything

Reciprocal agreements usually cover only earned income -- wages, salary, tips and commissions.

They do not apply to other sources of income, such as interest, lottery winnings, capital gains or any other money that is not earned through employment. 

Reciprocal agreements don't have any effect on federal taxation -- tax withholdings that are paid to the Internal Revenue Service. The IRS doesn't care what state you live in or where you earn your income. it still wants its share. 

You May Still Need to File a Return in Both States

If your employer withheld local taxes from your pay when he should not have, file a tax return in that state for a refund. For example, if your employer mistakenly withheld D.C. taxes from your paycheck for even a few weeks, you would have to file a D.C. tax return to get that money back.  

More information: Which states have reciprocal agreements?