Do you live in one state, but work in another? Many neighboring states have special rules to deal with this situation. The agreement between New Jersey and Pennsylvania is one example.
People who live in New Jersey but drive over the bridge to work in Pennsylvania are often unsure about their state income tax obligations. Unfortunately, many Pennsylvania employers are also unsure about this.
New Jersey and Pennsylvania have a Reciprocal Income Tax Agreement. This means the two states have agreed that their residents can cross the state line to go to work without needing to pay tax in the work state. A New Jersey resident may work in Pennsylvania, but he will only need to pay income tax to New Jersey. Likewise, a Pennsylvania resident who comes into New Jersey to work would only need to pay income tax in Pennsylvania.
It is important to note that the reciprocity only applies to compensation as an employee, and not self-employment income, rental income, business income, etc.
What should happen is that the New Jersey resident goes to work in Pennsylvania, and New Jersey state income taxes are withheld from the paycheck. If the employer is also within Philadelphia, city wage tax will also be withheld. Since New Jersey gives resident taxpayers a credit for taxes paid to other taxing jurisdictions, it is possible that the credit for the city wage tax is high enough to satisfy the entire New Jersey income tax liability. In this case, the employee may not need any state income tax withheld because the city wage tax would be enough.
What should not happen is for Pennsylvania income tax to be withheld from the pay of a New Jersey resident. If this is the case, the only way to get the Pennsylvania tax back is to file a Pennsylvania tax return showing zero wages and ask for a refund. Since a New Jersey resident shows all his income, no matter in which state it was earned, on his home state tax return, he would also be paying in New Jersey income tax on those same wages. And, because of the reciprocal agreement, you can’t simply take a credit on your New Jersey tax return for income taxes erroneously paid to Pennsylvania. Once the Pennsylvania refund is received, the taxpayer ends up the same, but filing the extra return and waiting for the refund is a hassle, and sometimes you have to provide extra documentation and it takes a long time to get the refund.
Any New Jersey or Pennsylvania residents who get a new job across the state line should look carefully at their first pay stub to make sure the correct taxes are being withheld. Don’t wait until the year is over to find out there is a problem when the W-2 is issued.
In conclusion, understanding the nuances of the Reciprocal Income Tax Agreement between New Jersey and Pennsylvania is crucial for residents who work across state lines. Ensuring that the correct state taxes are withheld from your paycheck can save you from the hassle of filing additional tax returns and waiting for refunds. It’s always a good idea to review your first pay stub from a new job to confirm that the appropriate taxes are being withheld according to your residency. By staying informed and proactive, you can navigate the complexities of interstate tax obligations with confidence and focus on your career without unnecessary financial stress. It’s always a smart move to consult with a tax professional. They can help you navigate your specific situation and ensure you’re making the best decisions for your financial future.
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Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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