Good news for Lehigh Valley residents who work in NJ
by Lester Bahr, CPA on 12/03/16
For those of your who live here in PA but work in NJ there was some good news a couple weeks ago when NJ Governor Chris Christie announced that he will not end the income tax reciprocity agreement between NJ and PA after all. With our region being so close to NJ I know there are a number of residents here in Allentown, Bethlehem, Easton area who commute over into NJ for their employment.
This issue all started earlier this year when Governor Christie said that he would end the 38 year old agreement with PA that allowed PA residents to pay income taxes in the state in which they live, rather than where they work effective in 2017.
Under this reciprocity, New Jersey doesn't collect income taxes from people living in Pennsylvania who work in New Jersey. In return, Pennsylvania also doesn't collect income taxes from people living in New Jersey and working in Pennsylvania.Rather, PA residents report and pay tax on income earned in NJ on a PA tax return; similarly, NJ residents report and pay tax on income earned in PA on a NJ tax return.
Had this reciprocity agreement been terminated, higher income PA residents who work in NJ would have paid higher tax. That's because PA' income tax rate is a flat 3.07% while NJ has a graduated income tax which can go as high as 8.97% Conversely, lower to middle-income NJ residents who work in PA would also not have liked this either in that they would have paid more since tax rates in NJ start as low as 1.4%, or about half of the PA flat tax rate.
The tax agreement allows for either state to unilaterally withdraw by providing 120 days' written notice prior to January 1 of the tax year. That means Christie's initial decision did not require approval from the NJ legislature. But, for now anyhow, there won't be any discontinuance of the PA and NJ reciprocity agreement.
As a tax practitioner, I would also point out that had this reciprocity agreement been terminated means that any PA resident working in NJ would have had their tax preparation process complicated as well in that they would have needed to also have a NJ non-resident tax return prepared, and then claim credit for NJ taxes paid on their resident PA tax return. So anyway, that situation has now been avoided.
I hope everyone has a good upcoming week. As for me, I am off to Asia for a couple weeks, so I'll be writing next week's blog post from Singapore.
Lester R. Bahr, CPA
