Reciprocal Tax Agreement Between States: Everything You Need to Know
A reciprocal tax agreement between states, also known as a reciprocity agreement, is a mutual understanding between two or more states regarding the taxation of income earned by an individual who is a resident of one state but works in another. This agreement allows the employee to pay taxes only in their state of residence, thus avoiding double taxation.
Why Reciprocal Tax Agreements Are Important?
Reciprocal tax agreements are essential for businesses and employees who work across state lines. Without a reciprocity agreement, employees may end up paying taxes twice, in both their state of residence and the state where they work.
This can be particularly costly for individuals who live in one state but work in a neighboring state. In some cases, they may end up paying significantly higher taxes compared to their counterparts who work and live in the same state.
How Do Reciprocal Tax Agreements Work?
The terms of a reciprocal tax agreement vary from state to state. Generally, a reciprocity agreement specifies that an employee will only have to pay income taxes in their state of residence if they work in another state that also has a reciprocal agreement.
For example, an employee who lives in Maryland but works in Virginia would only have to pay state taxes in Maryland if both states have a reciprocal agreement. If there is no reciprocity agreement, the employee would have to pay taxes in both states.
Which States Have Reciprocal Tax Agreements?
Currently, there are 17 states with reciprocal tax agreements, including:
– Illinois and Iowa
– Illinois and Kentucky
– Illinois and Michigan
– Illinois and Wisconsin
– Indiana and Kentucky
– Indiana and Michigan
– Maryland, Virginia, West Virginia, and Washington D.C.
– Michigan and Wisconsin
– Minnesota and Michigan
– Montana and North Dakota
– New Jersey and Pennsylvania
– North Carolina and Virginia
– Ohio and Indiana
– Ohio and Michigan
– Oregon and Idaho
– Pennsylvania and Maryland
– Wisconsin and Michigan
It is important to note that reciprocity agreements can change. Employers and employees should check with their state`s Department of Revenue or a tax professional to ensure that they are up to date on any changes in the state`s reciprocity agreements.
Conclusion
In summary, a reciprocal tax agreement between states allows employees to avoid double taxation when they work in a state different from their state of residence. These agreements are essential for businesses and employees who work across state lines. While many states have reciprocity agreements in place, it is important to stay informed about any changes and consult with a tax professional to ensure compliance with tax laws.