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.
What Is Reciprocity?
Reciprocity is an agreement between certain 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 where they work. A Supreme Court ruling prevents employees from having to pay state taxes to two jurisdictions.
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. The IRS doesn't care what state you live in or where you earn your income. It still 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. 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.
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, you would have to file a D.C. tax return to get that money back if your employer mistakenly withheld D.C. taxes from your paycheck, even for just a few weeks.
Actual taxation by two states is prohibited by the 2015 Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne et ux.
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.
States With Reciprocity
The following states have reciprocity with one or more other states. You can live in any of the states with which it has a reciprocal agreement without having to file a tax return in your work state to get back any taxes that were withheld from your paychecks. Taxes won't be withheld in the first place.
- Arizona: Reciprocity with California, Indiana, Oregon, and Virginia
- 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
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 on May 28, 2015 that no two states 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 and, in fact, the court decision requires them to do just that. But you'll have to file tax returns to claim the credits each year.
Very 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.
- A 2015 Supreme Court decision ruled that you can’t be required to pay taxes to two separate states in any event, so 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.
Urban Institute. "Individual Income Taxes." Accessed July 9, 2020.
Northwestern Mutual. "How to Do Taxes If You Live and Work in 2 Different States." Accessed July 9, 2020.
CPA Journal. "ICYMI | Supreme Court Rules that Two States May Not Tax the Same Income." Accessed July 10, 2020.