NJ Governor Chris Christie announced that, effective January 1, 2017, NJ is unilaterally terminating the state’s reciprocity agreement with PA. Under the current agreement, taxpayers were allowed to pay income tax in the state where they lived, not where they worked. Accordingly, PA residents who are employed in NJ will need to have NJ taxes withheld from their wages and will need to file NJ tax returns. Also, NJ residents who are employed in PA will start to have PA income tax withheld and will need to file PA tax returns.
Gov. Christie did state that he would reconsider his decision if the NJ Democratic controlled legislature can find sufficient tax revenues or cost savings to close the state’s budget gap.
It is estimated that 125,000 taxpayers commute each way according to Census Bureau estimates. This change would mean that high wage earners residing in PA will be subject to NJ’s higher graduated rates (ranging to a high of 8.97%). Likewise, South Jersey residents who work in Philadelphia will be paying more income taxes – to Harrisburg.
In addition to a possible state income tax increase, there will be increased compliance cost. Taxpayers affected by this decision will be required to file two state tax returns, one for NJ and another for PA. The complexity of the returns will also increase since the taxes paid to the state where the taxpayer works can now be claimed as a credit against the taxes due the state where the employee resides. PA residents would be required to file estimated local earned income taxes since this tax would not be withheld by a NJ employer. For NJ residents working in Philadelphia, the Philadelphia 3.47% non-resident wage tax would be required to be paid in addition to the PA tax of 3.07% since the Philadelphia tax cannot be claimed as a credit against PA income taxes. NJ had allowed NJ residents to claim this credit against their NJ taxes.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
