Contributed by PhillipB FreeTaxUSA Agent TaxPro
What is a Reciprocal Agreement?
A reciprocal agreement between states allows a resident, who lives in one state and works in another state, to file only one resident state return, and only have tax withheld for the resident state.
As a rule, income can be taxed both in the state where it is earned and in the state where a person lives. Some states simplify the process of needing to file both a resident and nonresident return when working in one state and living in another state through reciprocal agreements.
The chart below shows states with reciprocal agreements. If the state you work in has a reciprocal agreement with the state you live in, your wages aren't taxed in your work state so you’ll only file one return for the state you live in
If your work state and your home state don't have an agreement, you'll need to file a tax return with both states. (How to Claim the Credit for Taxes Paid in Another State.)
Withholding Issues
Most states require nonresident workers to file an exemption form (linked in the table below) so your employer doesn’t withhold taxes for that state unnecessarily.
If you’re having taxes withheld incorrectly in the state where you work, then you’ll need to file a nonresident return for that state to get a refund. Inquire with your employer if they can withhold taxes for your home state. If your employer won’t do this, you’ll want to consider paying estimated tax payments during the year to the state where you live. If all the taxes withheld from the nonresident return are refunded, you should claim an exemption from taxes in the state where you work using the correct form from the list below.
States with Reciprocal Agreements:
- Work in Arizona, live in CA, IN, OR, VA
- Work in Illinois, live in IA, KY, MI, and WI
- Work in Indiana, live in KY, MI, OH, PA, or WI
- Work in Iowa, live in IL
- Work in Kentucky, live in IL, IN, MI, OH, VA, VA, or WI
- Work in Mayland, live in DC, PA, VA, or WV
- Work in Michigan, live in IL, IN, KY, MN, OH, or WI
- Work in Minnesota, live in MI, or ND
- Work in Montana, live in ND
- Work in New Jersey, live in PA
- Work in North Dakota, live in MN or MT
- Work in Ohio, live in IN, KY, MI, PA, or WV
- Work in Pennsylvania, live in IN, MD, NJ, OH, VA, or WV
- Work in Virginia, live in DC, KY, MD, PA, or WV
- Work in DC, live in any other state
- Work in West Virginia, live in KY, MD, OH, PA, or VA
- Work in Wisconsin, live in IL, IN, KY, or MI
What if I Have Nonresident Business or Rental Income?
In many situations, the reciprocal agreement only covers income from wage and salary employment. If the income from the state where you work came from sources other than wages (business, property, interest, capital gains, etc.), then you may still need to file a tax return with that state. You can contact your work state’s tax department if you’re not sure.
Special Situations for residents of Arizona, Oregon or Virginia working in California
If you’re a resident of one of these states and working in CA, you’ll need to file a nonresident return even with a reciprocal agreement.
First, prepare your resident state tax return as you normally would. Second, prepare a CA nonresident tax return for the income earned/sourced in California. This will allow you to claim an Other State Tax Credit on your nonresident California return.
