Understanding how reciprocal agreements affect Other State Tax Credit calculations in ProConnect Tax

In most states, income earned in one state by a resident in another state is taxed by both states. Generally, the state of residence offers a credit for some part of the tax paid to the other state.

A reciprocal agreement, or reciprocity, is an agreement between two states that allows residents of one state to request exemption from tax withholding in the reciprocal state.

There are generally two ways reciprocal agreements work:

1. Income not taxed at source: both states tax the income, but the state of residence offers the credit.
2. Reverse credit states: both states tax the income, but the nonresident state offers the credit.

ProConnect Tax calculates most entries for the Other State Tax Credit screen, including the effects of most reciprocal agreements, automatically when the taxpayer is a full-year resident.