What You Need to Know About the End of the New Jersey/Pennsylvania Reciprocal Tax Agreement

 – November 3, 2016
What You Need to Know About the End of the New Jersey/Pennsylvania Reciprocal Tax Agreement
AlertUPDATE: On November 22, Governor Christie announced that the reciprocal agreement will remain intact.

In September 2016, Governor Chris Christie ended the 40-year-old tax agreement between New Jersey and Pennsylvania that allowed individuals who work across state lines to pay state income tax in the state where they live instead of where they work. The end of this reciprocal tax agreement goes into effect January 1, 2017.

The tax change will bring more revenue into New Jersey since Pennsylvania residents working in the state will be taxed on income earned in New Jersey. Reports say that New Jersey will reap an additional $180 million in revenue. According to the U.S. Census Bureau, approximately 250,000 New Jersey and Pennsylvania residents could be impacted by this agreement.

New Jersey Residents Working in Pennsylvania

Starting January 1, New Jersey taxpayers working in Pennsylvania will need to pay Pennsylvania state taxes at 3.07 percent. An employer in Pennsylvania will be required to withhold Pennsylvania taxes for any employee working in the state. The employee may need to ask their employer to withhold New Jersey income tax in addition to the Pennsylvania withholding, or the taxpayer should make estimated tax payments to New Jersey. CPAs may need to help their clients by working out that number with them.

Beginning in the 2018 filing season, New Jersey residents working in Pennsylvania will need to file a tax return for both states.

  • Complete a Pennsylvania tax return (PA-50) stating that the taxpayer is a nonresident, and report withholdings and wages earned in the state of Pennsylvania.
  • New Jersey will provide a credit for taxes paid to Pennsylvania. Further details are expected from the New Jersey Division of Taxation soon.

Pennsylvania Residents Working in New Jersey

Starting in the 2018 filing season, Pennsylvania residents who work in New Jersey will need to file a New Jersey tax return in addition to their Pennsylvania tax return (PA-40). New Jersey employers may withhold New Jersey taxes for Pennsylvania residents. Taxpayers may receive a resident credit toward their Pennsylvania income tax obligation for income taxes paid in New Jersey.

In addition to paying Pennsylvania state taxes at 3.07 percent, Pennsylvania residents working in New Jersey will also need to pay New Jersey state taxes. The amount will depend on the taxpayer’s income. New Jersey’s tax rate is progressive and depends on income; the rate caps out at 8.97 percent. Pennsylvania residents working in New Jersey will pay taxes in New Jersey depending on their progressive rate but will receive a credit for these taxes on their Pennsylvania return. For example, if a Pennsylvania resident is paying income tax at 7 percent in New Jersey and 3.07 percent in Pennsylvania, ultimately the taxpayer will pay the 7 percent to New Jersey but wipe their Pennsylvania tax to zero. 

In order for Pennsylvania residents to receive a credit for the taxes paid to New Jersey, they’ll need to complete a PA Schedule G-L, Resident Credit for Taxes Paid to Other States and include a copy of their New Jersey tax return.

Business Owners in Pennsylvania and New Jersey

The New Jersey Department of Taxation has not yet issued a statement about whether employers will be required to withhold New Jersey state taxes for Pennsylvania residents. But employers should be aware that this may be the case. However, if withholding is not required, a best practice would be to let affected employees know how much they should put away to cover Pennsylvania income taxes.