California Reciprocal Tax Agreements.
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California Reciprocal Tax Agreements: What You Need to Know
Reciprocal tax agreements are agreements between states that allow residents of one state to work in another state without having to pay income taxes in both states. California has reciprocal tax agreements with seven other states that are designed to make it easier for residents who work across state lines. If you`re a California resident who either works in one of these states or is considering a move, here`s what you need to know.
Which States Have Reciprocal Tax Agreements with California?
California has reciprocal tax agreements with Arizona, Indiana, Oregon, Virginia, Maryland, New Jersey, and Pennsylvania. This means that if you live in California and work in one of these states, you only have to pay income taxes in California (and not in the other state).
How Does the California Reciprocal Tax Agreement Work?
The reciprocal tax agreement works by allowing residents of California who work in one of the other states to file a form with their employer (called the Employee`s Withholding Allowance Certificate, or Form DE 4). This form instructs the employer to withhold California state income tax instead of the other state`s income tax.
For example, let`s say you live in California and work in Pennsylvania. You would need to file a Form DE 4 with your employer instructing them to withhold California state income tax on your wages instead of Pennsylvania state income tax. This means that you would only need to file a tax return in California (and not in Pennsylvania).
What if You Live in One of the Other States and Work in California?
If you live in one of the other states and work in California, the reciprocal tax agreement works the same way. You would need to file a form with your employer in California instructing them to withhold your state income tax for your resident state (and not California). This means that you would only need to file a tax return in your resident state (and not California).
What Are the Benefits of Reciprocal Tax Agreements?
Reciprocal tax agreements are beneficial for residents who work across state lines because they prevent double taxation (which is when you have to pay income taxes in both your resident state and the state where you work). They also make it easier to file your taxes since you only need to file a tax return in one state (instead of two).
In conclusion, if you`re a California resident who works in one of the seven states with a reciprocal tax agreement, make sure to file the Form DE 4 with your employer to avoid double taxation. And if you`re a resident of one of the other states who works in California, remember to file a form with your California employer to avoid having to file a tax return in both states. Understanding how reciprocal tax agreements work can help you save time and money when it comes to filing your taxes.