, Answering FAQ'sTurboTax Employee
A reciprocal agreement allows residents of one state to request exemption from withholding for wages earned in a reciprocal state. This simplifies tax preparation because the employee only needs to file one state tax return instead of two.
Lets say you live in state A, but work across the river in state B. These states do not have a reciprocal agreement, or do not have reciprocity. Your employer in state B is required to withhold taxes for state B. Every year after completing your resident tax return for state A, you would have to file a nonresident return for state B to get your withheld taxes back. In many, but not all cases, state B would recognize state A as your normal tax home and not tax your income.
However, if state A and state B have reciprocal agreements, you can request exemption from state B tax withholding by filling out state B's exemption form and giving it to your employer. The employer may also be able to make withholding payments to state A, further simplifying your taxes. Now you only have to file a tax return for state A, your resident state. You save time and work, as well as the cost of a second state program!
States with reciprocity agreements
The chart below shows the current list of reciprocal states and a link to each state's exemption form. States not listed below do not have reciprocal agreements.