NJ Withdraws from PA Reciprocal Personal Income Tax Agreement

On Friday, September 2, 2016, Governor Chris Christie reportedly gave Pennsylvania notice of New Jersey’s intent to withdraw from the Reciprocal Personal Income Tax Agreement. Under this agreement, which has been in effect since 1977, residents of one state who earned wages in the other state only paid taxes to their state of residency on such wages.  Under the agreement, either state may terminate the agreement as of the beginning of a calendar year by giving 120 days’ notice to the other state. As it currently stands, the reciprocal agreement will be terminated as of January 1, 2017.

Impact on Employees Residents of one state who earn wages from the other state will now be subject to tax in the state in which the wages are earned, meaning the filing of 2 state tax returns for such individuals. These individuals will then be entitled to take a credit for taxes paid to the other state on their resident state tax returns. In many instances, this credit will be less than 100% of the additional tax incurred. 

Example:  New Jersey residents earning wages in Pennsylvania previously only paid taxes to New Jersey on their wages earned in Pennsylvania. Starting in 2017, such individuals should notify their employers to have Pennsylvania taxes withheld, and will have to file a Pennsylvania non-resident return. They will then take a credit on their New Jersey return for taxes paid to Pennsylvania. For individuals working in Philadelphia, the combined Philadelphia/Pennsylvania tax rate will often exceed their New Jersey tax rate.

Impact on Employers Employers who were withholding on wages based on an employee’s residence will now have to withhold based on where the wages are earned. In the above example, starting January 1, 2017, the employer will have to start withholding Pennsylvania taxes on wages earned in Pennsylvania. 

As Governor Christie may be using this as leverage in negotiating budgetary matters, there is the possibility that this agreement termination will be revoked prior to taking effect.