What Is Reciprocity for State Income Tax?

What Is Reciprocity?

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Do you have to pay income tax to both states if you live in Virginia and work in D.C.? Not since a 2017 Supreme Court decision, and not when states have reciprocal tax agreements in place.

"Reciprocity" means that states have agreed to exempt from taxation the earned incomes of workers who live in another state. 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. The agreements are most common between neighboring states.

An Example

You can file an exemption certificate with your employer in D.C. to avoid paying income tax there if you live work there but live in Virginia. Taxes won't be withheld from your paycheck, but this doesn't mean that you don't have to pay any state income tax. Your employer should withhold Virginia state 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 if the two jurisdictions did not have a reciprocal agreement.

Filing a tax return does not necessarily mean your income is taxed. You can do so simply to claim a refund of taxes that were wrongfully withheld. 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 states taxes and forward them to that state, 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 June 2019.

The first state listed is where you work. 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 there. You must typically file your work state's exemption certificate with your employer, however.

  • 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

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.

The Effect of Maryland v. Wynne

Maryland v. Wynne applies to all states, not just to Maryland, although Maryland initially brought the suit. The U.S. Supreme 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 reciprocity agreements in place.

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 decision requires them to do just that. But you'll probably have to file tax returns to get it all straightened out.

You Might Still Need to File a Return in Both States

File a tax return in the state where you work for a refund if your employer withheld state taxes from your pay when he should not have. 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.

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 money that is not earned through employment.

Reciprocity has no effect on federal taxation, either, or on 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.