Reciprocity Agreement
An agreement between two states where residents working across state lines only pay income tax to their home state, not the state where they work.
A reciprocity agreement is a compact between two or more states that allows residents who work in a neighboring state to pay income tax only to their state of residence, not to the state where they are physically employed. This simplifies tax filing and prevents double taxation for cross-border commuters.
For example, New Jersey and Pennsylvania have a reciprocity agreement. A New Jersey resident working in Pennsylvania would only pay New Jersey income tax on those wages, not Pennsylvania tax. Without the agreement, they would need to file a Pennsylvania return, pay Pennsylvania tax, and then claim a credit on their New Jersey return for taxes paid to Pennsylvania.
Not all neighboring states have reciprocity agreements, and the specifics vary. Common pairs include Illinois-Iowa, Virginia-Maryland-DC, Ohio-Indiana, and Minnesota-Wisconsin. To take advantage of a reciprocity agreement, you typically need to file a state-specific exemption form (like Pennsylvania's REV-419) with your employer so they withhold tax for your home state instead of the work state.
Related Terms
State Income Tax
Income tax levied by individual states, in addition to federal income tax. Rates and structures vary widely — some states have no income tax, while others have rates up to 13.3%.
Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the IRS on your behalf throughout the year.