Maryland Tax Reciprocity: What It Means for Residents and Nonresidents

Maryland’s tax reciprocity agreements are significant for residents and nonresidents working across state lines. These agreements simplify tax obligations by preventing individuals from paying income taxes in both their home state and the state where they work.

Understanding these agreements is crucial for those living or working near Maryland’s borders, ensuring compliance with tax laws while optimizing financial outcomes.

States with Reciprocity

Maryland residents working in neighboring states benefit from reciprocity agreements that prevent dual taxation. Maryland has agreements with the District of Columbia, Pennsylvania, Virginia, and West Virginia.

District of Columbia

The reciprocity agreement with the District of Columbia allows Maryland residents working in D.C. to pay income taxes only to Maryland. To utilize this, Maryland residents must submit D.C.’s Form D-4A, “Certificate of Nonresidence in the District of Columbia,” to their employer. This ensures Maryland state taxes are withheld instead of D.C. taxes. Residents are still required to file a Maryland state tax return, reporting all income earned, including that from D.C.

Pennsylvania

Maryland residents working in Pennsylvania can also avoid paying Pennsylvania income taxes under the reciprocity agreement. They must complete Pennsylvania’s Form REV-419 EX, “Employee’s Nonwithholding Application Certificate,” to ensure only Maryland taxes are withheld. Proper documentation of Maryland residency, such as a driver’s license, is necessary. All income must be reported on Maryland tax returns to avoid penalties.

Virginia

For Maryland residents employed in Virginia, the agreement exempts them from Virginia state income taxes. Residents must submit Virginia’s Form VA-4, “Personal Exemption Worksheet,” to their employer to ensure Maryland taxes are withheld. Maintaining proof of Maryland residency, such as voter registration or a driver’s license, is advisable for tax filings or audits.

West Virginia

Maryland’s agreement with West Virginia allows residents working there to pay income taxes only to Maryland. They must submit West Virginia’s Form WV/IT-104, “West Virginia Employee’s Withholding Exemption Certificate,” to their employer. Residents should stay updated on any changes to West Virginia tax policies that might affect reciprocity agreements.

Determining State Residency

State residency determines tax obligations, especially for individuals living or working near state borders. In Maryland, residency is defined by the Maryland Tax-General Article 10-101. Those maintaining a permanent home in Maryland for more than 183 days in a tax year are considered residents. For others, factors such as the location of a primary residence, voter registration, driver’s license, and financial ties like bank accounts can establish residency.

Withholding Exemptions

Understanding withholding exemptions is essential for managing take-home pay and avoiding underpayment or overpayment of taxes. Maryland’s Form MW507 allows taxpayers to claim exemptions based on personal allowances, dependents, and other deductions. Each exemption reduces taxable income, but claiming too many exemptions can result in underpayment, while claiming too few may lead to overpayment. Employees should review their withholding status regularly, especially after significant life changes.

Multiple State Returns

Filing multiple state tax returns can be complex for those earning income in more than one state. Taxpayers often need to file a nonresident tax return in the state where they work and a resident return in their home state. This requires careful income allocation according to each state’s tax laws.

Claiming Credits

Maryland residents working in states without reciprocity agreements or earning income from nonreciprocal states can avoid double taxation by claiming a credit for taxes paid to other states. This credit, outlined in Maryland Tax-General Article 10-703, offsets Maryland tax liability by the amount paid to another state.

To claim the credit, taxpayers must file Maryland Form 502CR, “Income Tax Credits for Individuals,” along with their Maryland return. Documentation, including a copy of the nonresident return filed in the other state and proof of payment, is required. The credit is limited to the lesser of the tax paid to the other state or the Maryland tax liability on the same income. It does not apply to local income taxes levied by Maryland counties. Consulting a tax professional can help maximize the credit while ensuring compliance with filing requirements.