On September 2nd, New Jersey Governor Chris Christie signed an executive order, which would be effective on January 1, 2017, ending the Wage Reciprocity Agreement between New Jersey and Pennsylvania. At this time, the executive order is not law, but it is expected to be enacted as law. If enacted, the executive order means that for 2017 (but not 2016) tax returns, those individuals who work in one of the two states and live in the other will have to file two state tax returns; one for New Jersey and one for Pennsylvania. The taxpayers will receive a tax credit on their resident state for the taxes paid to the non-resident state. New Jersey believes that they will collect about $180 million in tax revenue from this new law. There are many wealthy Bucks County individuals who commute into New Jersey for work, who come January 1, 2017, will be subject to the top individual tax rate in New Jersey of 8.97%, while Pennsylvania’s tax rate is a flat 3.07%.
For many individual taxpayers who live in one state and work in another state will now be required to report their wages to both their resident state and to the non-resident state. However, the individual receives a tax credit on their resident state return for the taxes they paid to the non-resident state. This has been true for many years for New Jersey residents who commute to New York, or vice versa. However, for about 40 years, there has been wage reciprocity (but not self-employed income reciprocity) agreement between New Jersey and Pennsylvania. New Jersey residents who work in Pennsylvania (and vice versa) were taxed only in the state in which they live. This means that those individuals only filed taxes in their resident state, although New Jersey residents working in Pennsylvania did receive a tax credit for Pennsylvania local income taxes paid.
Starting in 2017, New Jersey residents, who work in Pennsylvania, should consider making New Jersey estimated tax payments, in order to make up for the 5.9% shortfall between the New Jersey maximum tax rate and the Pennsylvania flat withholding tax rate. Pennsylvania residents should not be affected, as the New Jersey income tax is greater than the Pennsylvania income tax rate.
Our firm is well positioned to do year round Federal and state income tax planning for both your individual taxes and for your business. If you have any questions about this new tax law, please contact us.
Learn more about our tax planning & compliance services here.