Many major cities, or even those close to the border of a neighboring state, have a significant portion of taxpayers who travel from another state to work there. For example, many New Jersey residents work in New York City, or Marylanders may drive to Virginia. It may not seem like a hassle to cross the border, but what does working in a different state mean for your taxes?
It doesn’t mean your taxes will be doubled. You won’t end up owing more than your fair share of taxes. Some states have reciprocal agreements, which mean you don’t have to pay taxes in specific neighboring states if you work there. For states without these agreements, you will file a resident and non-resident tax return to ensure you are being taxed appropriately.
Reciprocal Agreements
Certain states have agreements in place with their neighbors, affording taxpayers the ability to work in nearby state without having to pay taxes there. The following lists reciprocal agreements between certain states:
District of Columbia: You don’t have to pay income tax for the district unless you are a resident
Illinois: Citizens of Iowa, Kentucky, Michigan and Wisconsin are exempt
Indiana: Citizens of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin are exempt
Iowa: Citizens of Illinois are exempt
Kentucky: Citizens of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin are exempt
Maryland: Citizens of D.C., Pennsylvania, Virginia and West Virginia are exempt
Michigan: Citizens of Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin are exempt
Minnesota: Citizens of Michigan and North Dakota are exempt
Montana: Citizens of North Dakota are exempt
New Jersey: Citizens of Pennsylvania are exempt
North Dakota: Citizens of Minnesota and Montana are exempt
Ohio: Citizens of Indiana, Kentucky, Michigan, Pennsylvania and West Virginia are exempt
Pennsylvania: Citizens of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are exempt
Virginia: Citizens of D.C., Kentucky, Maryland, Pennsylvania and West Virginia are exempt
West Virginia: Citizens of Kentucky, Maryland, Ohio, Pennsylvania and Virginia are exempt
Wisconsin: Citizens of Illinois, Indiana, Kentucky and Michigan are exempt
If you fall under any of these reciprocal agreements, you’ll have to fill out an exemption form, which will lessen the burden at tax time. You will only be required to pay taxes in the state in which you reside, and you won’t have to pay income tax in the state you work. Each state has a different form, so be sure to obtain the correct exemption form from your HR department or the IRS.
Don’t forget: The reciprocal agreement is only relevant to employment income. If you receive additional forms of income from another state, even if it is a neighboring state with a reciprocal agreement, you will still need to file a non-resident tax return. For additional information you should contact your financial advisor.
States Without Agreements
If you live in one state and work in another state that does not have a reciprocal agreement, you’ll need to file two tax returns: one resident and one non-resident.
On your regular return, the resident tax return for your home state, you will report all sources of income you received during the tax year, including those earned in the different state.
On your non-resident return, you only have to list income you made in the state. Generally, you can claim a tax credit within your home state to cover the taxes you paid to your work state.
Other Income Sources
If you have income from any state outside your home state, you’ll need to file a non-resident tax return. This can include any of the following:
- Rental property income
- Property sales
- Lottery/gambling winnings
- Money for services performed out of state
- Consultation fees or contract work income
- Income originating from a partnership, S-corporation, or LLC
