Typically when a taxpayer lives in one state and is employed in another, and both states levy an individual income tax, they will file two tax returns:
- A resident return to the state where they live;
- A nonresident return to the state where they work.
However, some states have a reciprocity agreement between them that precludes the taxpayer needing to file a nonresident return to the state where they work.
What does state tax reciprocity mean?
A reciprocity agreement between two states means that each state's residents only pay tax on income earned as an employee to their resident state. In this scenario the employer in the nonresident state should not withhold state taxes for the nonresident state.
In addition to simplifying the tax preparation process, the taxpayer doesn't have to wait for a refund from their nonresident state.
Not all states have reciprocity agreements with other states, and reciprocity only affects state and local income taxes, not federal income tax. See below for a list of states that have reciprocity agreements.
What should a taxpayer do if there is not a reciprocity agreement?
If the taxpayer's state of residence and state of employment don't have a reciprocal agreement, the taxpayer will need to file an income tax return in both states, assuming both states levy an individual income tax.
Federal law prohibits more than one state taxing the same income, so the resident state typically provides either a tax credit or a refund for taxes owed to another state for income earned in the other state. However, see the Reverse Credit section at the bottom of this article regarding how Indiana, Oregon, and Virginia handle the credit with reciprocal states.
What can the taxpayer do so taxes are not withheld by a reciprocal state employer?
The taxpayer can request their employer in the nonresident state not to withhold income tax per the reciprocal agreement. This is typically done using a state-approved form filed with the employer. Links to state withholding exemptions forms are provided below.
What if income tax was withheld by a nonresident reciprocal state?
The taxpayer should file a tax return with the nonresident state to have the tax withholdings refunded. There won't be a credit available on their resident return for those taxes since they didn't owe them.
States with tax reciprocity
| State | Reciprocal agreements with: | Form to exempt from tax withholding |
| Arizona | California, Indiana, Oregon, Virginia | Form WEC |
| District of Columbia | All states | Form D-4A |
| Illinois | Iowa, Kentucky, Michigan, and Wisconsin | Form IL-W-5-NR |
| Indiana | Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin | Form WH-47 / 9686 |
| Iowa | Illinois | Form IA 44-016 |
| Kentucky | Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin | Form 42A809 |
| Maryland | D.C., Pennsylvania, Virginia, West Virginia | Form MW507 |
| Michigan | Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin | Form MI-W4 |
| Minnesota | Michigan and North Dakota | Form MWR |
| Montana | North Dakota | Form MW-4 |
| New Jersey | Pennsylvania | Form NJ-165 |
| North Dakota | Minnesota and Montana | Form NDW-R |
| Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia | Form IT 4NR |
| Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia | Form REV-419 EX |
| Virginia | D.C., Kentucky, Maryland, Pennsylvania, West Virginia | Form VA-4 |
| West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia | Form WV IT-104 |
| Wisconsin | Illinois, Indiana, Kentucky, Michigan | Form W-220 |
Reverse Credit States
Indiana
On its resident tax return, Indiana does not provide a credit for double-taxed income in Arizona, Oregon, and the District of Columbia. An Indiana resident filing a nonresident tax return with one of those states or DC must claim a credit for taxes paid to Indiana on the nonresident return.
Oregon
On its resident tax return, Oregon does not provide a credit for double-taxed income in Arizona, California, Indiana, and Virginia. An Oregon resident filing a nonresident tax return with one of those states must claim a credit for taxes paid to Oregon on the nonresident return. If the nonresident state does not give the credit, see the OR-40 instructions for how to amend the Oregon return to claim the credit.
Virginia
On its resident tax return, Virginia does not provide a credit for double-taxed income in Arizona, California, the District of Columbia, and Oregon. A Virginia resident filing a nonresident tax return with one of those states or DC must claim a credit for taxes paid to Virginia on the nonresident return.
Note: This is a guide to state reciprocal agreements with information to help preparers and their clients. It is not intended as tax advice.