NJ PA Tax Agreement: Everything You Need to Know

If you are a resident of New Jersey or Pennsylvania who works across the border, you might have heard about the NJ-PA Tax Agreement. This agreement regulates the taxation of income for residents who work in one state and live in the other. In this article, we will discuss everything you need to know about the NJ PA Tax Agreement.

What is the NJ PA Tax Agreement?

The NJ-PA Tax Agreement is a bilateral tax agreement between the states of New Jersey and Pennsylvania. It was first signed in 1977 and revised in 2016 to change the tax rates. The agreement allows residents of either state who work in the other state to avoid double taxation of income. Without this agreement, residents would have to pay income tax to both states, resulting in double taxation.

Who is Eligible for the NJ PA Tax Agreement?

Residents of either state who work in the other state are eligible for the NJ PA Tax Agreement. To be eligible, you must be a resident of either New Jersey or Pennsylvania and work in the other state. This means that you must have a full-time job or a business located in the other state.

How does the Agreement Work?

The NJ PA Tax Agreement allows residents of either state to pay income tax only to their state of residence. For example, if you are a resident of Pennsylvania who works in New Jersey, you will only pay income tax to Pennsylvania. Similarly, if you are a resident of New Jersey who works in Pennsylvania, you will only pay income tax to New Jersey.

To avoid double taxation, you must file a tax return in both states. You will have to report your income earned in the other state on your resident state`s tax return. You will also receive a credit for the taxes paid to the other state to avoid paying tax twice.

What are the Tax Rates under the NJ PA Tax Agreement?

Under the NJ PA Tax Agreement, residents of either state who work in the other state pay income tax at their state`s resident tax rate. For example, if you are a resident of Pennsylvania who works in New Jersey, you will pay income tax to Pennsylvania at the Pennsylvania resident tax rate. Similarly, if you are a resident of New Jersey who works in Pennsylvania, you will pay income tax to New Jersey at the New Jersey resident tax rate.

Conclusion

The NJ PA Tax Agreement is a crucial agreement that helps residents of New Jersey and Pennsylvania avoid double taxation. If you are a resident of either state who works in the other state, you must file a tax return in both states and report your income earned in the other state. By doing so, you can avoid paying tax twice and get a credit for the taxes paid to the other state. If you have any questions about the NJ PA Tax Agreement, you should consult a tax professional.