PA/NJ Reciprocal Tax Agreement Isn’t Going Anywhere

For nearly 40 years, the Pennsylvania/New Jersey Reciprocal Income Tax Agreement has made it possible for residents of New Jersey to work in Pennsylvania but only pay income tax to the state of New Jersey, and vice versa. Pennsylvania companies only withhold New Jersey income tax for New Jersey residents and report it to New Jersey, and vice versa.

In other words, if you live in one state and work in the other, you only pay taxes to the state in which you live. You don’t have to file two tax returns, and you don’t have to claim a credit against taxes owed in the state where you live for taxes paid in the state where you work.

This is particularly advantageous for Pennsylvania residents, who pay a flat state income tax rate of 3.07 percent, compared to New Jersey’s progressive tax that ranges from 1.4 percent to 8.97 percent for those who make more than $500,000. New Jersey residents who fall into the lowest income tax bracket and work in Pennsylvania pay less in state taxes as well. This agreement also allows New Jersey residents to obtain a tax credit against the Philadelphia City income tax.

The Bombshell

New Jersey Governor Chris Christie announced in September 2016 that this agreement would be eliminated on January 1, 2017. New Jersey was facing a $250 million budget deficit and this move would net $180 million for the state. The termination of the reciprocal agreement would affect about 125,000 residents who commute from New Jersey to Pennsylvania, another 125,000 who do the reverse commute, and all of the companies who employ these individuals.

That announcement from the governor’s office was a big deal. Large corporations were re-evaluating their construction plans and recruitment strategies. Thousands of residents who crossed state lines to work were bracing for smaller paychecks and more complicated tax filings. Governor Tom Wolf of Pennsylvania said the move would have “punished” Pennsylvanians and the state. The nonpartisan Tax Foundation called the decision a loss for tax simplicity.

The Reversal

On November 22, 2016, Governor Christie reversed course, saying he would not pull the plug on the Pennsylvania/New Jersey Reciprocal Income Tax Agreement. According to a statement, health benefit reforms would produce $200 million in savings in the coming year, allowing Governor Christie and his administration to “save” the agreement.

A Collective Deep Breath

After much hand-wringing, the agreement will remain. We understand that some people may question the true motivations for choosing to nix and then ultimately keep the tax agreement, but our job is not to engage in political debate. Our job is to present information so you can make the best possible decisions.

Unfortunately, some employers and payroll companies undoubtedly wasted time and resources to prepare for the change in policy. There is no question that the change, while generating additional revenue for New Jersey, would have had a negative impact on many companies and interstate commuters. But the agreement will remain for the foreseeable future.

This is another example of why it’s important to communicate with your accountant throughout the year, not just at tax time. Stay on top of the latest regulations and legislation, and make sure you understand how they impact your family and your business.

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