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Reciprocal Personal Income Tax Agreements

Several states have adopted income tax reciprocity agreements with one or more sister states—including the District of Columbia. These agreements allow income to be taxed in the state of residence even though it is earned in another state, as long as the state where the income was earned is a party to the reciprocity agreement. Such reciprocity agreements are an exception to the rule stating that the state in which income is earned has the primary right to tax that income.

In addition to reducing administrative reporting burdens, states with these agreements do not anticipate significant revenue loss because of them. Even considering the number of nonresidents working in a given state, its tax rate, and taxpayer income levels, the taxable revenue shared between the states may be about the same in both states.

Generally, reciprocal agreements only cover compensation, such as wages, salaries, tips, commissions, and bonuses a taxpayer receives for personal and professional services. But states may specify that certain income, such as lottery winnings, is not covered under reciprocity agreements.

Reciprocity agreements can simplify tax filing for some taxpayers. But in general, U.S. tax laws are very complicated. Fortunately, there are inexpensive tax preparation programs that people can use to make the annual tax filing chore easier. Taxpayers may also consult experienced tax professionals or attorneys for in-depth answers to more complex issues or for other specific tax advice.

Inside Reciprocal Personal Income Tax Agreements