How Do DC Reciprocity Taxes Work for Filing State Tax Returns?

Living in Washington, D.C., but working in a neighboring state can complicate tax filing. Normally, you would need to file taxes in both locations, but reciprocity agreements simplify the process by allowing residents to pay income taxes only where they live.

Reciprocity Agreements With Neighboring States

Washington, D.C. has reciprocity agreements with Maryland and Virginia, meaning D.C. residents working in either state pay income taxes only to D.C. and do not need to file nonresident tax returns.

For example, a D.C. resident working in Arlington, Virginia, must submit Form D-4A, the Certificate of Nonresidence in the District of Columbia, to their employer to prevent Virginia income tax withholding. If this form is not submitted, Virginia taxes may be withheld, requiring the employee to file for a refund.

Maryland follows a similar process. A D.C. resident working in Bethesda must provide their employer with Form MW507, the Maryland withholding exemption certificate, to avoid Maryland tax withholding. If not submitted, Maryland taxes may be withheld, necessitating a nonresident return for a refund.

Determining Your Tax Residence

Tax residency is based on where you maintain a permanent home, spend most of your time, and register for legal purposes such as voting or vehicle registration. The District of Columbia considers you a resident if you are domiciled in D.C. or live there for at least 183 days in a tax year.

Domicile refers to your permanent home. Temporary work in another state does not change your domicile unless you take formal steps to establish residency elsewhere, such as obtaining a new driver’s license, registering to vote, or changing your mailing address.

For those dividing time between multiple locations, tracking the number of days spent in each place is essential. If you exceed 183 days in D.C., you are generally considered a resident for tax purposes. This rule prevents individuals from avoiding D.C. income taxes while still using public services.

Filing Requirements and Forms

D.C. residents must file Form D-40, the District of Columbia Individual Income Tax Return, to report all sources of income, including wages, self-employment earnings, and taxable interest or dividends. The filing deadline typically aligns with the federal deadline of April 15, with extensions available.

Additional schedules may be required for those with rental income, freelance work, or capital gains. Schedule H allows eligible filers to claim the D.C. Homeowner and Renter Property Tax Credit based on income and housing costs.

Electronic filing through MyTax.DC.gov is encouraged for submitting returns, making payments, and checking refund statuses. Late payments incur interest and penalties, with a failure-to-pay penalty of 5% per month, up to a maximum of 25% of the unpaid amount.

Adjusting Your Wage Withholding

Ensuring the correct tax withholding prevents unexpected tax bills or excessive refunds. Employees working in D.C. should complete Form D-4, the Employee Withholding Allowance Certificate, which instructs employers on how much to withhold. This form should be updated when financial circumstances change, such as marriage, the birth of a child, or income adjustments.

The IRS Tax Withholding Estimator helps determine the correct allowances for federal and D.C. taxes. Underpayment can result in penalties, while overwithholding delays access to funds that could be used for savings or investments.

Handling Multiple-State Earnings

Earning income in multiple states while residing in D.C. can complicate tax obligations, especially for income beyond wages covered by reciprocity agreements. While D.C. residents working solely in Maryland or Virginia are exempt from filing nonresident returns in those states, additional income from other states—such as freelance work, rental properties, or business activities—may require separate filings.

For example, if a D.C. resident works remotely for a company based in New York, that state may require a nonresident return. New York follows the “convenience of the employer” rule, meaning if the job could have been performed in New York but is done remotely for personal reasons, the income remains taxable in New York. In this case, the taxpayer must file a New York nonresident return while still reporting all income on their D.C. return.

To prevent double taxation, D.C. allows a credit for taxes paid to other jurisdictions, claimed on Schedule U of Form D-40. However, the credit is limited to the amount of D.C. tax that would have been due on the same income, so taxpayers may still owe additional amounts if the other state’s tax rate is higher.