Knowledge and Insights
Governor Christie announced this week that he will NOT rescind the New Jersey – Pennsylvania Reciprocal Tax Agreement, as he threatened to do earlier this fall and I wrote about last week, giving taxpayers on both sides of the Delaware River something to add to their gratitude list for Thanksgiving. The agreement will stand as it has for the last several years, allowing taxpayers living in New Jersey or Pennsylvania, but working in the neighboring state, to only file tax returns in their resident state. This alleviated the need for taxpayers to comply with both New Jersey and Pennsylvania tax filings and simplified the payroll tax reporting for employers as well. Governor Christie credited health benefit reforms identified and enacted by the State Health Benefits Commission and Plan Design Committee, estimated to save $200 million in Calendar Year 2017, with saving the reciprocity agreement.
Previous Article – The End Of An Era? The Potential Termination Of The NJ-PA Reciprocal Tax Agreement
The 38-year-old New Jersey-Pennsylvania reciprocal tax agreement may be coming to an end. On September 7, 2016, New Jersey’s Governor, Chris Christie, gave Pennsylvania the required 120-day notice to end the deal. If Governor Christie does not reverse his position before the end of the year, effective January 1, 2017, residents of New Jersey and Pennsylvania that cross the bridge to get to work in their neighboring state will face new tax filing requirements.
The standing reciprocity agreement simplified tax filings for border-crossing workers for years. New Jersey does not collect income taxes from people living in Pennsylvania and working in New Jersey nor does Pennsylvania collect income taxes from people living in New Jersey and working in Pennsylvania. This has enabled the employee to only pay income taxes to the resident state versus the employer and resident states. For Pennsylvania residents, a 3.07% flat tax rate applies to all taxable income. In New Jersey, graduated rates ranging from 1.4% to 8.97% are in effect. New Jersey is forecasting collection of an additional $180 million in income taxes from Pennsylvania residents employed in New Jersey.
With the elimination of the agreement, residents working in the neighboring state will file tax returns in both New Jersey and Pennsylvania. Prior to this change, employees only filed returns in their home state. The resident state will provide a credit for the taxes paid to the other jurisdiction. However, the credit is only granted to the extent the income would have been taxed in the home state.
The additional income tax impact will be felt by higher income Pennsylvania residents and lower-to- middle income New Jersey residents. Single taxpayers with income over $35,000 and married, joint-filing taxpayers with income over $70,000 who are Pennsylvania residents working in New Jersey, will be subject to the higher New Jersey tax rates ranging from 3.5% to 8.97%. On the other hand, some New Jersey residents working in Pennsylvania will also pay more. Single taxpayers with income under $35,000 and married joint-filing taxpayers with income under $70,000 currently subject to New Jersey rates ranging from 1.4% to 1.75%, will now also file in Pennsylvania and pay 3.07%.
If you need assistance understanding how the reciprocity agreement termination will impact you in 2017, please contact a member of Mercadien’s Individual Services team or me at email@example.com or 609-689-9700.