On Nov. 22, 2016, New Jersey Governor Chris Christie announced he would rescind the termination of the reciprocal tax agreement between New Jersey and Pennsylvania. This was a reversal of the governor’s Sept. 2, 2016, notification to Pennsylvania of New Jersey’s intent to terminate the reciprocal tax agreement and would have been effective Jan. 1, 2017.
The almost 40-year-old agreement between Pennsylvania and New Jersey allows residents of those states to pay taxes on compensation earned as employees in their state of residence and not their state of employment. The termination of the agreement would have meant that residents of either state would pay taxes to the state where they work and take a credit against their resident state tax for the taxes paid to the state of employment. Affected employees would have been required to file tax returns in both states.
Pennsylvania residents making more than $100,000 would have been most heavily affected by the termination of the agreement due to the disparity in income tax rates between Pennsylvania (3.07 percent) and New Jersey (graduated rates with the top rate of 8.97 percent imposed on taxable income over $500,000). The governor’s decision to rescind the termination of the reciprocity agreement maintains the status quo and means residents of both states who cross the Delaware River to work will continue to only pay taxes to their state of residency.
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