Tuesday, July 31, 2012

Virginia: No deduction for taxes paid to MD in error

If you live in one state but work in another, your employer will generally withhold and remit taxes to the state where you are working - not where you are living. However, you will owe tax to your state of residence on all the income you earn, regardless of where you earned the income. Your home state will probably give you a credit for taxes paid to other states so you will only wind up paying tax to one state. For example, if you are a resident of DE working in MD:

• if you paid $150 to MD but DE would have charged you $100 on that income you will receive a $100 credit.

• if you paid MD $80 but DE would have charged you $100 on that income you will receive an $80 credit.

Some states will not give you the credit at all so you do wind up double paying. Some adjacent states have adopted reciprocity agreements. In these cases, your employer may withhold and remit only the tax for your home state. VA ruled that since reciprocity with MD is available if it is not taken advantage of (i.e. a VA resident working in MD still withholds and remits MD tax) VA will not offer a credit for the taxes paid in error. Hopefully the taxpayer in this case was able to obtain a full refund from MD!

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