Does Rhode Island Have Reciprocity With Massachusetts for Taxes?

Living in one state and working in another complicates tax obligations, particularly income taxes. Some states have reciprocity agreements that simplify filing for cross-border workers, but Rhode Island and Massachusetts do not have such an agreement.

Income Tax Reciprocity

Some states allow residents to work across state lines without filing multiple tax returns through income tax reciprocity agreements. These agreements prevent double taxation by requiring workers to pay only their home state’s income tax. Instead of filing in both states, employees submit an exemption form to their employer, ensuring only their resident state withholds taxes.

Reciprocity agreements are common in regions with high cross-border employment, such as the Midwest and Mid-Atlantic. For example, Pennsylvania has agreements with New Jersey and Maryland, allowing residents to avoid filing nonresident returns. Without such agreements, individuals must file in both states and claim tax credits to offset payments.

Current Status Between Rhode Island and Massachusetts

Rhode Island and Massachusetts do not have a reciprocity agreement, meaning residents working in the other state must file tax returns in both jurisdictions if they meet income thresholds.

Massachusetts applies a flat income tax rate of 5% in 2024, while Rhode Island has a progressive structure ranging from 3.75% to 5.99%. A Rhode Island resident working in Massachusetts is subject to Massachusetts income tax on those earnings but can claim a Rhode Island credit for taxes paid to another state to mitigate double taxation.

Massachusetts requires nonresidents earning more than $8,000 in the state to file Form 1-NR/PY. Rhode Island residents must report all income, including Massachusetts wages, on their Rhode Island return. Properly allocating income and claiming credits is necessary to avoid overpayment or underpayment.

Withholding Obligations for Cross-Border Employment

Without a reciprocity agreement, employers withhold state income tax based on where the employee works. A Rhode Island resident working in Massachusetts has Massachusetts tax withheld, while a Massachusetts resident working in Rhode Island has Rhode Island tax withheld.

Massachusetts employers must withhold taxes for nonresidents earning wages in the state, following Department of Revenue rules. Rhode Island employers follow Division of Taxation regulations requiring withholding for employees working in Rhode Island, regardless of residency.

If an employer withholds for the wrong state, employees may need to request a refund and make estimated payments to the correct state. Some adjust withholdings to offset potential tax liabilities, such as increasing Rhode Island withholdings if they work in Massachusetts. Payroll departments and tax professionals can assist in structuring withholdings to align with filing obligations.

Nonresident Filing Requirements

Massachusetts requires nonresidents to file a state income tax return if they earn more than $8,000 from Massachusetts sources. This includes wages, commissions, and other compensation from employment in the state.

Nonresidents can claim a prorated personal exemption based on the percentage of income earned in Massachusetts. Apportioning income correctly is particularly important for remote workers or those with variable job locations. Errors in allocation can lead to discrepancies and audits.

Residency audits have increased as states seek to maximize tax revenue. Massachusetts may challenge a taxpayer’s nonresident status if they maintain significant ties to the state, such as a secondary residence or prolonged work presence. Reclassification as a part-year or full-year resident can significantly impact tax liabilities.

Tax Credits for Double Taxation

Rhode Island residents working in Massachusetts can claim a credit for taxes paid to Massachusetts, preventing double taxation. To do so, they must complete Schedule W and attach it to their RI-1040 return. The credit is limited to the lesser of the tax paid to Massachusetts or the Rhode Island tax due on the same income. Excess Massachusetts taxes cannot be refunded or carried forward.

Massachusetts does not offer a similar credit for nonresidents. Massachusetts residents working in Rhode Island must pay Rhode Island tax without a direct offset on their Massachusetts return. However, Massachusetts allows residents to deduct certain out-of-state taxes as an itemized deduction.

Proper documentation, such as a copy of the Massachusetts tax return and proof of tax payments, is required to substantiate the Rhode Island credit. Errors in calculating the credit or failing to provide supporting documents can result in delays or denials.

Penalties for Incorrect Filing

Both states impose fines and interest on underpaid taxes, late filings, and incorrect returns. Rhode Island charges a late filing penalty of 5% of the unpaid tax per month, up to 25%, plus interest. Underpayment penalties may apply if estimated payments or withholdings are insufficient.

Massachusetts enforces a late filing fee of 1% per month and interest on unpaid balances. A negligence penalty of 20% may apply if the Department of Revenue determines a taxpayer substantially understated their income.

Accurate reporting and proper allocation of income are necessary to avoid penalties. Taxpayers should review their filings annually to ensure compliance and maximize available credits.