The Garden State has seen its fair share of out-of-state employees joining the workforce. So, for an employee who travels from another state in which they live, to work in New Jersey, has to file multiple tax returns at tax time, right? Not necessarily, as it depends on the state in which you reside thanks to reciprocal tax agreements.
Reciprocal tax agreements allow workers from certain states to be exempt from paying income tax on their wages to the state of New Jersey. They still file a return as normal in their home state. New Jersey holds such an agreement with the state of Pennsylvania, meaning residents who cross into Jersey to work aren’t required to pay taxes on the money they earn.
Earned income is the key. These agreements only apply to employment income and do not cover other sources of income such as rental income, personal property sales, partnerships, LLCs, or S-corporation profits, gambling winnings, or interest. A taxpayer who has any of these types of income from New Jersey will have to file a nonresident return, as these sources are taxed according to New Jersey rates.
Pennsylvanians should submit Form NJ-165 to their employer in order to be exempt. Additionally one may need to submit a return to both states if income tax was accidentally withheld, because a credit for the overpayment can be claimed.
It’s important to note that New Jersey does not hold a reciprocal agreement with any of its neighboring states in the Tri-State Area (New York and Connecticut). Residents of these states will need to file a return and claim a credit for the taxes paid to the jurisdiction in New Jersey.