2016 Tax Update: Governor Christie Reverses and Repeals New Law and Reinstates Pennsylvania-New Jersey Reciprocal Tax Agreement

IMPORTANT TAX ALERT:

New Jersey Governor Chris Christie on Tuesday, November 22, 2016, reinstated a four-decade old tax reciprocity agreement with Pennsylvania that allows residents who work in either state to pay income taxes at their home state’s rate. You can almost hear the collective sigh of relief of the many commuters that would have been adversely impacted by this new law.

The reversal and repeal of a new law that was previously announced to take effect in 2017 and previously discussed below means taxes will not rise for thousands of workers who commute between Pennsylvania and New Jersey for work.  Note that Pennsylvania has a flat personal-income tax rate of 3.07 percent, while New Jersey’s rate ranges from 1.4 percent for incomes under $20,000 to 8.97 percent for incomes over $500,000. Due to these different tax rates, the repealed new law would have resulted in higher taxes for many commuters.

The repeal of this law also means that taxpayers will not have to file tax returns in both states but only in the state where they live.

New Jersey and Pennsylvania have had a tax-reciprocity agreement in place since 1977. It allows residents to pay income taxes in the state where they live instead of where they work. This will continue now that the Governor has reversed course and should be great news to those who commute between New Jersey and Pennsylvania.

As Emily Litella (played by Gilda Radner) used to say on the early days of Saturday Night Live: “Never Mind!”

In September 2016, the governor of New Jersey ended a tax reciprocal tax withholding agreement with Pennsylvania effective Jan. 1, 2017. This nearly 40-year-old tax withholding agreement allowed commuters to pay income tax to the state where they live, rather than the state where they work.

The termination of this agreement impacts nearly 250,000 workers and thousands of employers in PA and NJ and will result in tax headaches for all concerned and increased taxes for some.

Starting on Jan. 1, 2017, Pennsylvania residents working in New Jersey will be subject to New Jersey income tax. Similarly, New Jersey residents working in Pennsylvania will be subject to the Pennsylvania income tax.

As a result for tax years beginning in 2017, individuals must file income tax returns in both states. Pennsylvania residents will get a credit for income tax paid to New Jersey on wages earned there. New Jersey will do the same. PA has a flat tax rate of 3.07 percent. The NJ tax rate increases by income level.

WHEN IS THE CHANGE EFFECTIVE?

The change takes effect Jan. 1, 2017. Impacted workers will file two tax returns in 2018 for wages earned in 2017.

DOES THIS IMPACT THE TAX RETURN I FILE IN 2017?

No. However, certain taxpayers will file quarterly estimated payments for 2017 wages (see below).

PENNSYLVANIA WORKERS

HOW DOES THIS AFFECT PA RESIDENTS WORKING IN NJ?

Starting in 2018, PA residents working in NJ will file a NJ income tax return then file a PA Income Tax Return (PA-40). They will get a credit toward their PA income tax obligation for income tax paid to NJ. This is called a resident credit.

To get the credit, complete a PA Schedule G-L, Resident Credit for Taxes Paid to Other States and include a copy of the NJ return when filing with PA. The credit is the lesser of tax paid to NJ or the income subject to tax in both states times 3.07%.

Certain workers will make quarterly payments (see below).

DO I INFORM MY EMPLOYER IF THIS IMPACTS ME?

We recommend telling your employer if the change affects you. There may be forms to complete so the proper taxes are withheld and remitted on your behalf. Check your pay statements to ensure the tax is withheld for the state where you work.

WHO MUST MAKE ESTIMATED PAYMENTS STARTING IN 2017?

If you are a PA resident working in NJ and your employer doesn’t withhold PA tax, you may need to make estimated tax payments to the PA Department of Revenue to avoid the estimated underpayment penalty.

However, there are  exceptions including the following:
• Your employer withholds PA tax;
• Your employer doesn’t withhold PA tax, but you plan to take the resident credit for taxes paid in NJ;
• You qualify for a Tax Forgiveness credit;
• Your total other income is less than $8,000.

If you are a NJ resident working in PA and your employer is not withholding NJ tax, you will need to contact the New Jersey Division of Taxation for its rules and regulations.

WILL I BE CHARGED A PENALTY SINCE I DIDN’T MAKE ESTIMATED PAYMENTS IN 2016?

No. This impacts wages earned starting Jan. 1, 2017.

I’M A PA RESIDENT WORKING IN BOTH PA AND NJ FOR THE SAME EMPLOYER: WHAT DOES IT MEAN TO ME?

Starting in 2017, if your employer meets the requirements to withhold income tax for both states, your employer will need to withhold taxes on the amount of compensation earned in both states.

However, you should calculate the number of days you work in PA and NJ and only pay income tax to NJ for the days you worked in that state. You should also claim a credit for taxes paid to NJ on PA Schedule G-L on your PA tax return.

If your employer only meets the requirements for withholding NJ taxes, your employer will only be required to withhold NJ income tax.

NEW JERSEY WORKERS

I’M A NJ RESIDENT WORKING IN PA: HOW DO I FILE?

Starting in 2018 for the 2017 tax year, you will file both a PA and NJ tax return. Indicate on your PA return (PA-40) that you are a nonresident. Report wages earned in PA and PA withholding. The PA personal income tax rate is 3.07 percent. Next, complete the resident NJ return and claim any applicable tax credit for PA taxes paid.

EMPLOYERS

I HAVE A BUSINESS IN PA, AND EMPLOY NJ RESIDENT(S). WHAT DOES IT MEAN FOR ME?

Starting in 2017, you will need to withhold PA taxes for your employees that reside in NJ.
Since PA and NJ have different tax rates, your employee may ask you to voluntarily withhold and remit NJ taxes, so they don’t have to make estimated quarterly payments.

I OWN A BUSINESS IN NJ, AND I EMPLOY PA RESIDENT(S). WHAT DOES IT MEAN FOR ME?

For 2017, please consult NJ’s instructions for withholding requirements. However, since PA and NJ have different tax rates, your employee may ask you to withhold and remit PA taxes, so they don’t have to make estimated payments.

I OWN A BUSINESS AND EMPLOY WORKERS IN BOTH STATES. WHAT DOES IT MEAN FOR ME?

Starting in 2017, if your business meets the requirements to withhold income tax for both states, you will need to calculate the earnings and tax withholding on the amount of compensation earned by any employee that works in both states.

KEY TAKEAWAYS:

Starting January 1, 2017:

• You may owe income tax to both states.

• If your employer doesn’t withhold tax for your home state, you may need to make estimated quarterly payments to that state.

• You will file a tax return with both states beginning in 2018.

• Your home state will give you a credit for taxes paid to the state where you work.

I hope this article has been of value to my readers.  If you do not want to miss future tax and estate alerts simply go to and complete FREE TAX AND ESTATE UPDATES: JUST ENTER YOUR EMAIL ADDRESS found at the upper right hand column of this website. Your email will only be used to send you notice of new tax and estate articles and will not be used for any other purpose and it will not be shared with any other parties.

Copyright © 2016 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

Disclosure and Disclaimer:  This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

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