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.