When you live near the border of another state, it’s quite common that you will cross into the other state for employment. In these cases, you may worry that you’ll be paying income tax twice on the money you earn, as you’ll owe both the state you work in and your home state. However, many states have agreed to exempt workers from paying tax in their “work state”, by setting up reciprocal tax agreements.

Residents of Illinois who work in Iowa do not have to pay income tax to Iowa on their wages thanks to a reciprocal tax agreement. These workers only have to file one state return in Illinois and report their wages earned in Iowa. In order to be covered under the reciprocal agreement, taxpayers should submit exemption Form 44-016 to their employer in Iowa.

Any other employee within the state of Iowa who lives in another state will be required to file both a resident tax return in their home state, and a nonresident return in Iowa, claiming the income earned. In most cases, the home state will offer a credit to cover the double payment of taxes.

Reciprocal tax agreements only cover income earned from employment. Other sources of income must be reported on a non-resident return and can include lottery winnings, money from the sale of personal property, rental income, fees offered for consulting and other services performed in the state, and earning from a partnership, LLC, or S-corporation.