Residents of one state tax can work in another state without having income taxes withheld in the state they are employed in, thanks to reciprocal tax arrangements. According to the state's tax laws, the income they receive from their place of employment is taxed. Reciprocal tax agreements will be in effect in 16 states by 2022, including the District of Columbia, Arizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, and West Virginia.
Tax reciprocity agreements enable
Following the laws of their home state, people of one state who work in another state must pay taxes on their earned income.
Reciprocal tax agreements also imply that if specific documentation is provided to employers, citizens of one state working in another may not be required to submit separate tax returns.
On state websites, you can find all of these forms. The proper form is most likely also in your human resources department.
Background on Double Taxation
To recoup any taxes incorrectly withheld, employees must file two or more state tax returns: a resident return in the state where they reside and a nonresident report in any additional states where they may work. This is known as the reciprocity rule. Practically, it is against federal law for two states to impose the same income tax.
States that Have Mutual Agreements
The map below displays 16 states where nonresident employees who reside in states with reciprocity are exempt from paying taxes. Additionally, Washington, D.C., and the states have a reciprocity agreement.
How State Reciprocal Accords Operate
Arizona
Arizona shares reciprocity with four other states: Indiana, Oregon, Virginia, and one neighboring state, California. To request an exemption from withholding, submit Form WEC, which exempts you from paying taxes to your employer.
DC, Washington
If you work in Washington, D.C., and reside in any other state, you are not required to submit a tax return there. Send your employer the "Certificate of Non-Residence in the District of Columbia" (exemption Form D-4A). Unfortunately, only two states—Maryland and Virginia—work in reverse with this. If you reside in D.C. but conduct business in either of these states, you are not required to file a nonresident return.
Illinois
If you live in Iowa, Kentucky, Michigan, or Wisconsin and work in Illinois, you must submit the exemption form, IL-W-5-NR, to your employer. Indiana has reciprocity with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. Submit the WH-47 exemption form to your employer in Indiana.
Iowa
Only Illinois and Iowa share reciprocity. If you live in Illinois and work in Iowa, your employer does not have wage-and-salary deductions for Iowa state income taxes. Exemption Form 44-016 must be submitted to your employer.
Kentucky
Seven states share reciprocity with Kentucky. If you work here but live in Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, or Wisconsin, you can submit exemption Form 42A809 to your employer. However, Virginian residents must commute daily to be eligible, and Ohioans are not permitted to own 20% or more of the stock in an S-chapter business.
Maryland
If you work in Maryland and reside in Pennsylvania, Virginia, West Virginia, or Washington, D.C., submit exemption Form MW 507 to your employer.
Michigan
Michigan has reciprocal agreements with Missouri, Michigan, Frankfort, Missouri, Tennessee, and Milwaukee. Your employer in Michigan will need to see your MI-W4 exemption paperwork if you're a resident of one of these states.
Minnesota
If you live in Michigan or North Dakota and work in Minnesota, you must submit exemption Form MWR to your employer.
Montana
If you live in North Dakota and work in Montana, you must give Form MW-4 to your employer.
Dakotas, North
If you live in Minnesota or Montana and work in North Dakota, you must submit the exemption form NDW-R to your employer.
What should you do if tax reciprocity is not available in your state?
You will have taxes withheld in the state where you work if your state and the state where you work do not have a reciprocal tax agreement. You will have to file taxes in both states at tax time to determine how much you owe or how much you will receive in refunds from each state. You won't be income taxed twice once everything is said and done.
What state tax form allows for tax reciprocity with other states?
To avoid having taxes withheld from your paycheck, you can claim an exemption from your state of residence with your employer in states with tax treaties with your home state. However, make sure that your employer is withholding your state taxes.
