Location:
TAXES - INCOME;

OLR Research Report


August 30, 2012

 

2012-R-0397

STATE INCOME TAXES ON INCOME SOURCED TO OTHER JURISDICTIONS

By: Rute Pinho, Associate Analyst

You asked which states impose income taxes on wages that residents earn in other states.

SUMMARY

The 41 states with broad-based income taxes and the District of Columbia tax residents on their entire taxable income, whether it was earned within or outside the state. The states with broad-based income taxes include every state except Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. But even though states tax income residents earn in other states, they allow those residents a corresponding credit against their income tax for taxes they paid to another jurisdiction. Each state has different rules for determining the amount of the credit and the types of credit-eligible income.

For example, a taxpayer who lives in Connecticut but works in New Jersey must pay both New Jersey and Connecticut income tax on his New Jersey wages, but he may apply a credit against his Connecticut tax for income taxes he paid to New Jersey on that income. However, if the taxpayer also had gambling winnings in New Jersey, he could not credit his New Jersey tax payment for those winnings against his Connecticut tax because, under Connecticut law, gambling winnings are not credit-eligible income.

In addition, some states have adopted reciprocal tax agreements with one or more states whereby they agree to tax income based on a taxpayer's residence, rather than the state where the income is sourced. Under these agreements, taxpayers who live in one state and work in another are only required to file a return and pay taxes in the state in their home state. Thus, the states forego tax revenue from nonresident income earned in their states and instead collect taxes on the income their residents earn in the other states. Generally, reciprocity agreements apply to compensation, including wages, salaries, commissions, and fees earned by an employee, and exclude other types of income, such as income from the sale or rental of property.

For example, Pennsylvania residents who receive compensation from New Jersey sources are not subject to New Jersey income tax on those earnings. Instead, they pay only Pennsylvania income taxes on them. Consequently, New Jersey employers withhold and remit Pennsylvania income tax for their Pennsylvania resident employees. The reverse is true for New Jersey residents and Pennsylvania employers with New Jersey resident employees.

Attachment 1 indicates whether each state and the District of Columbia has entered into reciprocity agreements and the states with which it has such an agreement. In all, 15 states and the District of Columbia have entered into agreements. Connecticut is among the other 28 states that have no reciprocity agreements.

Attachment 1: Reciprocity Agreements

Jurisdiction

Reciprocal Agreements

Jurisdiction

Reciprocal Agreements

Alabama

None

Mississippi

None

Arizona

None

Missouri

None

Arkansas

None

Montana

ND

California

None

Nebraska

None

Colorado

None

New Hampshire

None

Connecticut

None

New Jersey

PA

Delaware

None

New Mexico

None

District of Columbia

MD, VA

New York

None

Georgia

None

North Carolina

None

Hawaii

None

North Dakota

MN, MT

Idaho

None

Ohio

IN, KY, MI, PA, WV

Illinois

IA, KY, MI, WI

Oklahoma

None

Indiana

KY, MI, OH, PA, WI

Oregon

None

Iowa

IL

Pennsylvania

IN, MD, NJ, OH, VA, WV

Kansas

None

Rhode Island

None

Kentucky

IL, IN, MI, OH, VA, WV, WI

South Carolina

None

Louisiana

None

Tennessee

None

Maine

None

Utah

None

Maryland

DC, PA, VA, WV

Vermont

None

Massachusetts

None

Virginia

DC, KY, MD, PA, WV

Michigan

IL, IN, KY, MN, OH, WI

West Virginia

KY, MD, OH, PA, VA

Minnesota

MI, ND

Wisconsin

IL, IN, KY, MI

Source: CCH State Tax Guide

RP:ts