On September 2, 2016, faced with a $250 million budget deficit, New Jersey Governor Chris Christie terminated a nearly 40-year-old tax withholding agreement between the Commonwealth of Pennsylvania and the State of New Jersey. Elimination of the reciprocity agreement would have subjected Pennsylvania and New Jersey residents who work in the non-resident state to that state’s tax laws and rates, as well as required the filing of income tax returns in both states beginning in 2017.
In 82 days, the State of New Jersey was able to address the $250 million budget deficit, and on November 22, 2016, it reinstated the income tax reciprocity agreement—as we anticipated quite some time ago—to the delight of residents and businesses on both sides of the Delaware River.
The reinstated agreement allows commuters to continue to pay income tax to the state where they live, rather than the state where they work. The continuation of the tax reciprocal agreement means:
- Pennsylvania employers of New Jersey residents will continue to withhold New Jersey personal income tax on behalf of their New Jersey-resident employees and remit that tax to the State of New Jersey. As a result, New Jersey residents working for a Pennsylvania employer will be required to file only a New Jersey tax return.
- New Jersey employers of Pennsylvania residents will continue to withhold Pennsylvania personal income tax on behalf of their Pennsylvania-resident employees and remit that tax to the Commonwealth of Pennsylvania. As a result, Pennsylvania residents working for a New Jersey employer will be required to file only a Pennsylvania tax return.
The reinstatement of this tax reciprocity agreement preserves the existing state of affairs for taxpayers living in one of these two states and working in the other.