NJ PA Reciprocal Income Tax Agreement: Everything You Need to Know
If you live in either New Jersey or Pennsylvania and work in the other state, you may be wondering how income taxes work. Fortunately, the two states have a reciprocal tax agreement that makes it easier for residents to pay taxes without double taxation. This article will explain everything you need to know about the NJ PA reciprocal income tax agreement.
What is a Reciprocal Tax Agreement?
A reciprocal tax agreement is a legal agreement between two or more states that allows their residents to pay taxes only to their home state, even if they work in another state. This means that if you live in Pennsylvania and work in New Jersey, you do not have to pay income taxes in both states.
How Does the NJ PA Reciprocal Income Tax Agreement Work?
Under the NJ PA reciprocal income tax agreement, residents of one state who work in the other state pay income taxes only to their home state. For example, if you live in New Jersey and work in Pennsylvania, you will pay income taxes to New Jersey, and not to Pennsylvania. The same applies if you live in Pennsylvania and work in New Jersey.
However, there are a few things to keep in mind. First, you must file a non-resident tax return in the state where you work. This is because you are required to report your income earned in that state, even if you are not required to pay taxes there. You will also need to indicate that you are a resident of the other state on your tax return.
Second, you may be subject to local taxes in the state where you work. Some cities and municipalities in New Jersey and Pennsylvania have their own local income taxes, which are not covered by the reciprocal tax agreement. Therefore, you may need to pay local taxes in addition to state taxes, depending on where you work.
Third, the reciprocal tax agreement applies only to earned income, such as wages, salaries, and tips. It does not apply to other types of income, such as interest, dividends, or capital gains. You will need to pay taxes on these types of income to the state where you reside.
Finally, if you live in one state and work in the other state for only a part of the year, you may be required to file a state tax return in both states. This is because you are considered a part-year resident in both states, and you will need to report your income earned in each state during that period.
The NJ PA reciprocal income tax agreement is a helpful arrangement that makes it easier for residents of New Jersey and Pennsylvania who work across their state lines. By understanding how the agreement works, you can ensure that you pay the correct amount of taxes and avoid double taxation. If you have any questions or concerns about your taxes, it is always a good idea to consult with a tax professional.