Reciprocity MD and PA: Reside in both MD and PA, tax resident of MD, work is in PA and income comes from PA job; employer withheld state income from both states.

[Lizy]

I am filling non resident return for PA to ask refund and planning to file resident tax for MD. The software does not seem to acknowledge the tax reciprocity.
Question : How do I use the software to get refund from PA as PA non resident or are some income tax required to PA because the employer is located in PA, despite the fact that I am tax resident of MD and normally should only pay taxes to MD even if I work in another state (with a reciprocity agreement)? In the software, I am to pay additional PA taxes instead of getting a refund. 
I have not yet started the MD return since it’s advised to do the non resident return first. Please help 

[pk]

@Lizy  , am not sure I understand  the situation --- what I get is :

(a) you a resident of  MD  -- don't understand  "reside in both MD and PA, tax resident of MD".  You can be a resident of ONE state at a time.

(b) you are employed   (and all income is from employment )  in PA -- don't understand  "employer withheld  state income from both states"

(c) in such a situation  ( i.e. if ONLY Bold is true ) , you  needed to file ONLY a resident state --PA .  Because that should have been withheld  and there would be NO non-resident state.  

If the employer mistakenly had withheld  only PA then  you would have to file MD as resident,  and PA either as Non-Resident and ask for return of all withholding  asserting reciprocity between the two states of PA and MD.  Usually this  is a special form for the return of the withheld  taxes - you often do not have to do this using a non-resident filing  but  can do  that also.   I

Is your case where the employer  withheld for each state  only for part of the year  e.g. Jan through June for PA and Jul through Dec for MD ?   In  such a case   and assuming that  you were a resident of MD for the whole year,  you would file a Non-Resident return for PA  covering Jan through June withholdings and  allocating all the income to MD  i.e. zero to PA -- thus  all your  taxes would be refunded.  Then you prepare  the MD return  with the whole year income ( which you would do any ways  and claim NO earnings in another state ).  This then would result in all income being taxed ONLY by your  resident state -- MD

Does this make sense ?  Do you need more help ?

pk 

[Lizy]

Thanks for the answer! To clarify my post,

(a) I was a tax resident of MD the entire year and had logding in both states the entire year

(b) my employer is in PA and the work is in PA. This PA employer withheld MD and PA state income taxes as shown in my W2.

please clarify your guidance based on this clarification, thanks 

[Mike9241]

let's not talk residency but domicile.  you can be a resident of many states but you can only have one domicile at a time. so what is your state of domicile? 

Domicile is a person’s permanent place of dwelling. It is a legal relationship between a person and a locality. It may or may not be the same as a person's state of residence (not permanent).

For purposes of income taxes, “domicile” means a legal residence which is the place where a person has a fixed dwelling with an intention of making it his/her permanent home.

Domicile is a combination of two factors namely, residence and intent to remain. As the term domicile includes residence, the scope and significance of the term domicile is larger than the term residence.

Pennsylvania
Submit exemption Form REV-419 to your employer if you work in Pennsylvania but are a resident of Indiana, Maryland, New Jersey, Ohio, Virginia, or West Virginia

Maryland

Submit exemption Form MW507 to your employer if you work in Maryland and are a resident of the District of Columbia, Pennsylvania, Virginia, or West Virginia.

for this year and maybe 20201 you'll need to file returns in both states.  file a resident state return for your state of domicile. file a nonresident return reporting no income in the other state so you can get back your withholding.

[Lizy]

My state of domicile is Maryland (thanks for the additional details) and I was already trying to do what you recommend (non resident return for PA to get my money back) and MD resident return to pay full tax to MD, but when doing the PA return I am not due a refund.

do I put zero under wages in the PA return for the software to understand my situation?

[TomD8]

"do I put zero under wages in the PA return for the software to understand my situation?"

Assuming you were domiciled in MD for the entire tax year, yes, that is exactly what you do.   Your income is 100% taxable by your domiciliary state of MD.  MD residents are not subject to PA income tax on their W2 wages and salaries.

And, as @Mike9241 pointed out, be sure to submit PA Form REV-419 to your PA employer in order to stop the PA withholding.

https://www.revenue.pa.gov/FormsandPublications/FormsforBusinesses/EmployerWithholding/Documents/rev...

[Critter-3]

Yes, when asked to allocate how much of the income belongs to Pennsylvania the answer should be zero. This way all of the PA taxes that were withheld should be refunded which is your goal.

[Lizy]

@Critter-3 @TomD8 @Mike9241 @pk Thanks. I have included zero for the amount that should be allocated for PA. But under “Verify this income” section it says this “Keep in mind that deferred compensation (eg, 401K or 403b contributions) must be included in PA income.

What is the meaning of that statement for my situation? Am I still keeping the zero and just ignoring this software statement?

[Critter-3]

Keep the zero. 

[Lizy]

@Critter-3 @TomD8 @Mike9241 @pk My last question : the following screen is “Any special Pennsylvania W-2 situations”. 

When the software asks, did “You earned income in another state”, can I assume it is strictly referring only to the PA employer W2 and not another other out of state W2?

I did earn income in MD as part of a separate MD W2 but has nothing to do with “Pennsylvania W2 situations”.
 I clicked the other appropriate boxes (employer withheld taxes for another state and I am resident of a reciprocal state) . Many Thanks for any clarification 

[pk]

@Lizy  , assuming that your closer connection is to MD ( main residence, family connections, kids in school, banking, driver's license, voter reg etc. etc.), you are considered a resident of MD.  Thus  for PA when preparing  NON-RESIDENT return, you answer only for PA income i.e. any earnings  in "another state" question is not applicable  - and  "NO" is the answer.  Please make sure that you are filing a NON-RESIDENT return for PA and  all you show is the allocation of PA income ( W-2 income ) to MD ( reciprocity  agreement caused allocation to resident state of PA ).

Does this make sense ?  Is there more I can do for you ? 

stay safe 

pk

[Lizy]

@Mike9241 @TomD8 @Critter-3 Thanks so much for your previous clarifications! I have a follow up question as I re-review the situation where MD is the domicile and PA is the place of work. So, I understood that "income is 100% taxable by your domiciliary state of MD.  MD residents are not subject to PA income tax on their W2 wages and salaries."

-Are there any exceptions to this rule? Does the reciprocal rule applies also to (1) PA SUI/SDI tax (written in Box 14 of the W2), (2) PA local tax, and (3) relocation pay? Are these supposed to be taxed by the domiciled state of MD or by PA? Just double checking.

-I was trying to find the reference in MD or PA tax instructions. thanks for any feedback

[TomD8]

The MD-PA reciprocity agreement applies only to employee compensation reported on a W-2.  Employee compensation is reported in Box 1 of a W-2.  

[Lizy]

The payroll office seems to insist that the reciprocity rule between Maryland and Pennsylvania applies only to state taxes, and that it does not apply to PA local taxes or PA SUI/SDI taxes. They say PA local tax and PA SUI/SDI taxes are required in PA for MD resident (domicile) working in PA. So, I am trying to find some written reference about the reciprocity rule for my own records. Do you happen to have  a reference to share? thanks for the follow up

[TomD8]

Your payroll office is correct.  As a resident of MD you are not liable for PA state income tax on your W2 compensation.  You are however liable for local PA income taxes and PA SUI/SDI.

However, you may claim a credit on your MD tax return for the local PA income taxes you pay, by filing MD Form 502CR with your MD state return.

https://www.marylandtaxes.gov/forms/21_forms/502CR.pdf