Some states with high commuter populations have reciprocity agreements, meaning that even if you travel across state lines for work, you are solely taxed by your home state.
Taxes might be tricky if you work in one state and live in another. Additionally, state-by-state variations in the regulations might be substantial.
Reciprocity agreements allow you to be taxed only by your home state, even if you travel across state boundaries for work, in certain areas with high commuter populations. Nonresidents who physically work within the borders of other states are subject to taxes, but to prevent double taxation, they typically receive a tax credit from their home state. Additionally, several states have particularly complex tax laws for remote workers.
If you live in one state and work in another, here are some tax-related things you should know.
States With Reciprocity
The process is typically straightforward if the states where you reside and work have a reciprocity agreement.
“You will only be taxed where you reside; you won’t be taxed where the income is earned,” The Tax Policy Center’s senior policy associate, Richard Auxier,
If you work in your home state, you typically file a state income tax return, and you can request that your employer withhold income taxes for your home state.
Usually, the reciprocity agreements are with neighboring states where many commuters reside. For instance, reciprocity exists in Virginia, Maryland, and the District of Columbia.
The states with which Kentucky has the most tax reciprocity agreements are Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin. Certain states only have reciprocity agreements with one another. For instance, Montana offers reciprocity with North Dakota, New Jersey with Pennsylvania, and Iowa with Illinois.
States Without Reciprocity
Even though many commuters cross state lines in some states, not all of them provide reciprocity. You might need to take additional measures when filing your income tax return if the states in where you live and work do not have reciprocity.
In the state where you work, taxes might be deducted from your paycheck, and you might have to file both a resident income tax return in your home state and a nonresident income tax return with that state.
“You’ll have to file that income tax return if your state has an income tax, and you’ll usually get a credit” for taxes you paid to another state, according to Auxier. “In most cases, you won’t receive two taxes.”
A Few States Have More Complicated Rules
“There are so-called ‘convenience rules’ in New York and a few other states,” Walczak claims.
Even if you work somewhere else, they still pay that state if your office is there. This can lead to double taxation for many remote workers without offices whose employer is based in New York or another state with convenience rules, he continues.