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New Jersey Reciprocity Agreement with Pennsylvania Cancelled – Then Saved

The reciprocity agreement between New Jersey and Pennsylvania allows the residents of each of those states to pay income tax to their home state only, even if they work in the reciprocal state.

As New York tax professionals know, people who work in New York pay tax to New York even if they live in New Jersey or Connecticut. They have to file a New York Non-resident Tax Return, pay tax on their wages and other earnings in New York, and also file a Resident Return in their home state and claim a credit on their home state resident return for taxes paid to the other state. New York does not have a reciprocity agreement with any state, unlike New Jersey and Pennsylvania.

However, New Jersey Governor Chris Christie gave notice of termination of the reciprocity agreement on September 2, 2016 (to take effect on January 1, 2017) in order to address a potential $250 billion state budget deficit. But, on November 21, 2016, Governor Christie signed legislation that streamlined and modified the state’s pharmacy benefits system, saving up to $200 million in health care benefits costs and allowing him to save the NJ/PA reciprocal agreement.

With the NJ/PA reciprocity agreement still in place, Pennsylvania residents working in New Jersey do not have to file a New Jersey tax return. The New Jersey employer will withhold tax in the employee’s home state of Pennsylvania. Therefore, the employee only needs to file a Pennsylvania Resident Tax Return. Pennsylvania also has reciprocity agreements with the states of Indiana, Maryland, Ohio, Virginia and West Virginia.

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