California Reciprocal Agreement: All You Need to Know
If you have ever thought of moving to California or you currently reside in the Golden State and received a job offer from another state, then you might want to familiarize yourself with the California Reciprocal Agreement.
What is the California Reciprocal Agreement?
The California Reciprocal Agreement is an agreement between California and certain other states that allows residents who live in one state but work in the other to avoid paying income tax in both states. The agreement only applies to wages that are earned from employment; it does not apply to business income, rental income, or capital gains.
Which states have a Reciprocal Agreement with California?
Currently, California has reciprocal agreements with Arizona, Indiana, Oregon, Virginia, and most recently, Utah. This means that if you reside in any of these states but work in California, you will only be required to pay income tax in your home state.
How does the California Reciprocal Agreement Work?
If you are a resident of one of the states that has a reciprocal agreement with California and you work in California, your employer must withhold state income tax for your home state instead of California. This means that you will not need to file a California state tax return, but you will need to file a tax return in your home state.
However, if you work in California but reside in a state that does not have a reciprocal agreement, you will be required to pay California state income tax on your earnings.
It is important to note that in order to benefit from the Reciprocal Agreement, you must be a resident of one of the states listed above and not just a taxpayer. This means that you must have a permanent residence in the state and spend more than half of the year living there.
Conclusion
If you are considering working in California but reside in one of the states that has a reciprocal agreement, then you may be able to benefit from this agreement and avoid paying income tax in both states. However, it is important to do your research and make sure you meet the requirements to qualify for the agreement. If you are unsure, it is best to consult with a tax professional to ensure you are following all of the necessary tax laws and regulations.
