Can Two States Tax the Same Income? Credits and Reciprocity

In theory, two states can both claim the right to tax the same income, but in practice, most states prevent double taxation through either a resident credit (your home state credits taxes paid to the work state) or a reciprocity agreement (only your home state taxes your wages). The key is filing correctly in both states.

Can two states tax the same income?

Yes, two states can have overlapping jurisdiction over the same income. This happens most commonly when you live in one state and work in another. Your home state claims the right to tax your worldwide income because you are a resident. The work state claims the right to tax the wages earned within its borders because the income was sourced there.

Without any relief mechanism, you would owe tax to both states on the same wages. Most states recognized long ago that this outcome is unfair and creates a barrier to working across state lines. As a result, nearly every state with an income tax has adopted either a resident credit system, a set of reciprocity agreements with neighboring states, or both.

The U.S. Supreme Court addressed the double taxation issue in Comptroller of the Treasury of Maryland v. Wynne (2015), ruling that Maryland's failure to grant a full credit for taxes paid to other states violated the dormant Commerce Clause. That case reinforced the expectation that states must provide some mechanism to prevent double taxation, though the mechanics vary.

How the resident credit works

The resident credit (also called a credit for taxes paid to another state) is the default relief mechanism when no reciprocity agreement applies. Here is how it works step by step:

1. File a nonresident return in the work state. You report only the wages earned in that state. You pay that state's income tax on those wages at that state's nonresident rate.
2. File a resident return in your home state. You report all income from all sources. Your home state computes the full tax on your total income.
3. Claim the credit on the home state return. Your home state reduces your tax bill by the lesser of: (a) the actual tax you paid to the work state on that income, or (b) the amount of home state tax attributable to that same income. The credit is a dollar-for-dollar reduction in your home state tax, not a deduction.

The cap on the credit is important. If the work state's rate is higher than your home state's rate, you will pay the higher rate to the work state but your home state credit will only cover the home state's rate on that income. The excess is not refunded by either state. You effectively pay the higher of the two rates, but you do not pay both rates in full.

Conversely, if you live in a high-tax state and work in a low-tax state, the credit from the low-tax state may not fully offset your home state liability. You would owe additional tax to your home state to make up the difference.

Reciprocity agreements

Reciprocity agreements are bilateral arrangements between neighboring states that simplify filing for commuters. Under a reciprocity agreement, only your state of residence taxes your wages. The state where you work does not withhold or tax your wages.

To claim the benefit, you typically file a withholding exemption form with your employer. Your employer then withholds only for your home state. You file a single resident return in your home state and owe nothing to the work state (as long as all your income is wages covered by the agreement).

Some well-known reciprocity arrangements include agreements among states in the mid-Atlantic and upper Midwest regions. Examples of states that have had reciprocity arrangements with one or more neighbors include Virginia, Maryland, and the District of Columbia; Illinois and Wisconsin; Pennsylvania and New Jersey; and several others. These agreements are subject to change and can be terminated with notice.

Important: reciprocity agreements cover wages only. They generally do not cover self-employment income, rental income, or other income sourced to the work state. If you have non-wage income from a state with which your home state has a reciprocity agreement, you may still need to file a nonresident return for that income.

Check the current status of reciprocity agreements for the specific states involved through the respective state tax agency. Find links through our state tax directory.

When double taxation actually occurs

Despite the credit and reciprocity systems, genuine double taxation can still occur in several situations:

• Non-reciprocal states with mismatched rates: When the work state has a higher rate than the home state, the resident credit does not cover the full amount paid to the work state. You pay the work state rate in full but only receive a credit for the home state rate on that income. The rate differential results in extra tax with no credit against it.
• New York's convenience of the employer doctrine: New York taxes remote workers as if they worked in New York on every day of the year unless the remote work was required by the employer's necessity (not just the employee's preference). A person working remotely from New Jersey for a New York employer may owe New York income tax on those remote days, while also owing New Jersey tax on the same wages. New Jersey has introduced legislation to counter this, but the situation remains unresolved for many workers.
• States that do not allow credits for certain income types:Some states limit the resident credit to specific categories of income or specific states. An income type not covered by the credit provision may be fully taxed in both states.
• Dual residency: If you are considered a statutory resident by two states at the same time (see the 183-day rule), both states may tax your full income and each may limit the credit for taxes paid to the other. This is the most severe form of double taxation and is best avoided by careful planning of where you spend your days.

Investment and retirement income

The double taxation concern is most acute for wages, but investment and retirement income have their own rules:

• Dividends and interest: These are generally taxed only by your state of domicile, not by any state where the company is incorporated or where the brokerage account is maintained. Your home state taxes this income; other states do not.
• Capital gains from securities: Gains from selling stocks, bonds, and mutual funds are also taxed by your domicile state only. The state where the company is headquartered or the broker is located has no claim on these gains.
• Capital gains from real property: Gains from selling real estate are an exception. The state where the property is located taxes the gain, regardless of where you live. Your home state will also tax the gain but should grant a credit for taxes paid to the property state.
• Pension and retirement distributions: Federal law (4 U.S.C. Section 114) prohibits states from taxing retirement income of former residents. If you live in State B, State A (your former employer's state) cannot tax your pension or IRA distributions just because you earned those benefits while living there. Your current state of domicile has exclusive taxing rights on retirement income. Each state's rules on which retirement income is exempt from tax vary; see our state pages for details.

What to do if you work in two states

If you live in one state and work in another, here is the practical approach:

1. Check for a reciprocity agreement first. Look up whether your home state and work state have a current reciprocity agreement. If they do, file the exemption form with your employer and file only your home state resident return.
2. If no reciprocity, expect to file in both states. File the nonresident return in the work state first. Complete it before your home state return so you know exactly how much tax you paid to the work state.
3. Claim the resident credit on your home state return.Enter the taxes paid to the work state on your home state's credit form. The credit will reduce your home state liability dollar for dollar, up to the cap.
4. Verify your employer's withholding. Make sure your employer is withholding for the right states. If you live in a non-work state and no reciprocity applies, your employer should withhold for the work state. You may need to make estimated tax payments to your home state for the portion not covered by withholding.
5. Keep records of remote workdays. If you work remotely for a company in another state, track the days carefully. States like New York that use a convenience doctrine will apply their tax based on where your employer is located, not necessarily where you worked.

If you moved between states during the year, the rules become more complex. See Part-Year Resident Taxes: How Moving States Affects Your Return for a guide to splitting income and filing correctly in both states.