Working in a Neighboring State: How to Skip the Second Return
Agreements between neighboring states let you pay income tax only where you live. Here is how they work, which form to give your employer, and where the agreement does not apply.
Working in a Neighboring State: How to Skip the Second Return
Working across a state line usually means two returns: a nonresident return where you work and a resident return where you live. But some states have agreements with each other that cancel this arrangement entirely — wage income is taxed only in the state where you live.
According to the Tax Foundation, as of January 1, 2025 there are roughly 30 such agreements among 15 states and the District of Columbia. Almost all of them have been in place for decades; virtually no new ones have been signed since the early 1990s.
How it works
The idea is simple: the state where you work agrees not to tax your wages if you live in a partner state. In exchange, its own residents get the same treatment from your state.
What that gets you:
The key point: the agreement does not switch itself on
This is the single most common mistake. A reciprocal agreement does not apply automatically — your employer needs a basis for not withholding its own state's tax. That basis is the withholding exemption certificate you hand to HR.
Every state has its own form under its own name. File it when you start the job, and after that expect to renew it every year. If you never file it, tax will be withheld, and the only way to get it back is a nonresident return — which is exactly what the agreement would have let you avoid.
Who has an agreement with whom
No new agreements took effect for 2026, and the existing ones did not change. Confirm the exact pairings with your own state, but these configurations are verified:
Michigan — with Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin. Residents of those states file Form MI-1040 only if they had non-wage income in Michigan or want to recover tax that was withheld.
Illinois — with Iowa, Kentucky, Michigan and Wisconsin.
Pennsylvania — with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia.
New Jersey — with Pennsylvania only: wages earned in New Jersey by a Pennsylvania resident are not subject to New Jersey tax.
The District of Columbia is a case of its own: it does not impose income tax on nonresidents at all, so Maryland and Virginia residents who work in Washington do not need to file a DC return.
New York and New Jersey, on the other hand, have no agreement — the country's busiest commuting pair follows the ordinary route, with a credit for taxes paid to another state.
Where the agreement does not apply
Reciprocal agreements cover only an employee's wages, from which the employer withholds tax. They do not extend to:
There are narrow exceptions as well. Pennsylvania's agreement with Ohio, for example, does not apply to an Ohio resident who owns 20% or more of a Pennsylvania S corporation and works in Pennsylvania.
A separate word about local taxes. An agreement between states does not cancel city taxes. An Indiana resident working in Detroit can use the agreement for the state tax, but still pays the Detroit city tax.
An important detail for Illinois residents
Illinois taxes its residents' wages earned in partner states — and at the same time does not allow a credit for tax withheld by employers in those states. If such tax was withheld anyway, you recover it through that state's return, not through a credit in Illinois.
What to do
Sources
Lists of agreements and the exemption forms are on the state agency websites: michigan.gov/taxes, tax.illinois.gov, pa.gov/agencies/revenue, nj.gov/treasury/taxation. For a general overview, see the Tax Foundation.
If you work in a neighboring state and are not sure your exemption form was filed correctly, book a consultation — we will check it and see whether you have been overpaying in prior years.
