Prepare for the End of the Reciprocal IncomeTax Agreement between NJ & PA

HAMILTON, N.J. - Nov. 15, 2016 - PRLog -- NJ Governor Chris Christie gave notice to PA officials on September 2, 2016 that he is ending the nearly 40-year reciprocal income tax agreement between the Garden State and Commonwealth. This agreement allowed residents of both states to pay income taxes to the state of their residence. It also provided a tax credit against the city wage tax for NJ residents who work in Philadelphia. The U.S. Census Bureau estimates that 250,000 commuters will be impacted by his decision.

NJ stands to gain by ending the reciprocal tax agreement. Doing so will generate approximately $180 million in tax revenue to close the $250 million shortfall in NJ's budget. Even so, the financial impact on taxpayers could be substantial. Nearly 100,000 workers could pay an additional $1,000 or more in state income tax annually. In addition, PA Governor Tom Wolf projects that ending reciprocity will cost the Commonwealth $5 million annually.

Effective January 2017, people that commute to jobs across the Delaware River will pay income taxes to the state(s) where they earn salaries and wages. PA has a flat 3.07% income tax rate. NJ has a graduated income tax rate ranging from 1.4% to 8.97%.

The following are guidelines for employers and employees:

PA Employers of NN Residents
• Have employees that live in NJ complete a new Employee's Withholding Allowance Certificate (Form W-4) to adjust for PA withholdings.
• Withhold PA income tax for employees who reside in the Garden State.
• Withhold NJ income tax if requested by an employee who does not want to pay quarterly estimated taxes to the Garden State.
• Do not accept an Employee's Non-Withholding Application Certificate (REV-419) from NJ residents, as this form will no longer be applicable.
• Visit the NJ Department of Treasury – Division of Revenue and Enterprise Services at www.state.nj.us/treasury/revenue for additional guidance. Although you are not required to register with New Jersey as an employer, it is in your best interest to keep up-to-date on new developments.

New Jersey Employers of Pennsylvania Residents
• Have employees who live in PA complete NJ's Employee's Withholding Allowance Certificate form (NJ-W4).
• Withhold NJ income tax for employees who live in the Commonwealth.
• Withhold PA income tax if requested by an employee who does not want to pay quarterly estimated taxes to the Commonwealth.
• Do not accept an Employee's Certificate of Non-residence in NJ form (NJ-165) from PA residents, as this form will no longer be applicable.
• Cancel your employer withholding account if you no longer withhold taxes for PA by December 31, 2016. Either mail the Business Account Cancellation Form (REV-1706) to the PA Department of Revenue or registered e-TIDES users can cancel their employer withholding account online through the Enterprise Maintenance at www.etides.state.pa.us.

PA Residents Working in NJ
• Are required to file income tax returns in both states beginning in 2018 for income earned in 2017.
• May have to pay income tax to both states. PA has a flat 3.07% income tax rate. NJ has graduated income tax rate ranging from 1.4% to 8.97%. Taxpayers in a NJ tax bracket that is lower than 3.07% will pay the difference to PA.
• Could qualify for a resident credit toward your PA income tax obligation for income tax paid to NJ. The credit is the lesser of tax paid to NJ or the income subject to tax in both states times 3.07%.
• Taxpayers working in both states are advised to keep track of the number of hours worked in each location to properly report income earned.
• Might need to make estimated tax payments to the PA Department of Revenue to avoid paying an estimated underpayment penalty if your employer does not withhold PA income tax.

NJ Residents Working in PA
• Are required to file income tax returns in both states beginning in 2018 for income earned in 2017.
• May have to pay income tax to both states. NJ has graduated income tax rate ranging from 1.4% to 8.97% of income earned. PA has a flat 3.07% income tax rate. Taxpayers that earn enough money to be taxed at a rate higher than 3.07% owe the difference to NJ.
• Could qualify to receive a tax credit for income tax paid to PA. The credit may never exceed the amount you would have paid if you had earned the income in NJ.
• Taxpayers working in both states are advised to keep track of the number of hours worked in each location to properly report income earned.
• Might need to make estimated tax payments to the NJ Department of Treasury - Department of Revenue to avoid paying an estimated underpayment penalty if your employer does not withhold NJ income tax.

The end of the reciprocal agreement does not affect the Philadelphia wage withholding tax that individuals who work in Philadelphia are subject to pay.

Although there is always the possibility that Governor Christie will change his mind, if you are impacted by his decision to cancel the reciprocal income tax agreement, you should carefully evaluate the effect on your take home pay. In some situations, it could make a substantial difference in the money that will be available to meet your financial obligations, maintain your lifestyle, or save for the future. Consult with your tax advisor to discuss your specific situation.

This article is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.  We strongly advise you to seek professional assistance with respect to your specific issue(s).