Commuting to work has become such commonplace that several taxpayers even cross state borders to work. Living in one state and working in another doesn’t automatically mean that you have to pay taxes on your earnings twice. You’re only required to pay your fair share of taxes, so you should make sure you understand exactly what the rules are regarding your situation.
In many states, reciprocal tax agreements have been established to make taxing earned income for out of state residents a little bit simpler. Those who work in Maryland are covered by a reciprocal tax agreement if they are residents of Pennsylvania, Virginia, West Virginia and the District of Columbia. This agreement ensures that the only tax return they need to file is one in their home state, where wages earned in Maryland are reported.
Anyone working in Maryland who is not a resident of the states covered in the reciprocal agreement, will be required to file a non-resident return to account for taxes owed on income earned in the state. Reciprocal agreements only cover income earned through employment, so any “unearned income” would need to be reported on a non-resident return as well. Non-employment income can include:
- Interest from investments in Maryland
- Income from rentals in Maryland
- Lottery winnings
- Income from a partnership, LLC, or S-corporation
- Gains from the sale of personal property
To ensure you are exempt from paying taxes in Maryland as a resident of a state within the agreement, you should file exemption Form MW507 with your employer. You’ll only be responsible for paying takes to your home state.