On Friday, September 2, New Jersey Governor Chris Christie announced that he would end the tax reciprocity agreement with Pennsylvania.
As of now, the withdrawal of the agreement will take effect on January 1, 2017. However, Governor Christie said he would reconsider his decision to withdraw from the tax agreement with Pennsylvania if the New Jersey legislature balances the state budget, which requires $250 million in spending cuts to achieve.
The end of the reciprocity agreement means that Pennsylvania residents working in New Jersey will have New Jersey taxes withheld from their pay (instead of PA taxes). As a result, they will be required to file New Jersey tax returns, pay the New Jersey tax rate, and then file their Pennsylvania tax returns and take a credit for taxes paid to New Jersey on the Pennsylvania return. This will most likely mean Pennsylvania residents with high incomes will be paying more in taxes, because New Jersey has a graduated tax rate (up to 8.97%).
Conversely, for New Jersey residents working in Pennsylvania, they will need to have Pennsylvania tax withheld, file a Pennsylvania tax return, and then take a credit on their New Jersey tax returns for taxes paid to Pennsylvania. As a result, low to middle-income New Jersey residents who work in Philadelphia and other areas of Pennsylvania will likely pay more in taxes.
Philly.com posted an article on September 8 that explains the situation in detail. The article is available at this link.
Please contact one of our tax professionals with any questions you may have regarding this issue.