What Is State Income Tax Reciprocity?

 

If you live in one state and work in another, you might be able to take advantage of reciprocal state tax agreements. This is made possible when two or more states have an agreement to exempt the income earned by nonresidents from a nearby state.

For example, with state income tax reciprocity, a taxpayer who lives in Indiana but works in Kentucky will only pay income taxes to their state of residency.

Reciprocal State Tax Agreements

You should check with your employer to understand how they handle state tax reciprocity. In most cases, if there’s a reciprocal state tax agreement, you can fill out a withholding exemption request form for the nonresident state and submit it to your employer. That way, your employer will only withhold state income tax for the correct state.

Employers should review the reciprocal state tax agreements that pertain to their employees and the relevant states to understand exactly how to apply the rules. Additionally, employers should provide you with the appropriate form for the states involved.

Related Topics

Related Resources

Calculate Cost Basis For Stock Options

What should you know before you calculate the cost basis of stocks for tax purposes? Learn more from the tax experts at H&R Block.

What Is A Capital Gain Or Loss?

What is a capital gain or loss, and how do they affect your taxes? Learn more from the tax experts at H&R Block.

For Pro Golfers, Tough Taxes Are Par for the Course

Professional golfer taxes can be complicated and confusing. Learn more about tricky golfer tax issues like travel deductions and residency rules with H&R Block.

Taxes On 401K Distribution

Learn more about taxes on 401K distribution with advice from the tax experts at H&R Block.