Source income/nonresident income tax

PA has agreements with all bordering states except NY, and with VA as well, that commuters are taxed by their home states (I think this is true for only wages from employment and not profits from business).

What PA has done though is to rip-off all these states because there are local wage taxes of 1% (higher in Pittsburg, Scranton, and Philadelphia) that still result in commuters taking a tax-credit against their home-state income taxes while those states get nothing from commuters from PA.

As Stan says, there are several pairs of contiguous states that have reciprocal agreements whereby a resident of one state working in the other pays tax on earnings only to the state of residence. Most of those states are on the eastern seaboard or in the upper midwest. Southern and western states generally do not have such agreements.

Illinois had such agreements with Indiana and Wisconsin, among other states. A number of years ago Illinois decided it was getting ripped off by IN and WI because there were more residents of those states working in IL (mainly in Chicago) than vice versa. So Illinois went to the authorities in IN and WI and negotiated for compensation for the revenue loss it suffered as a result of the reciprocal agreements. They came to terms with WI but IN refused to pay. As a result there is no longer such an agreement between IL and IN.

Even between states with reciprocal agreements, a nonresident who has source income other than income from personal services (e.g., income from property or business located in the other state) must file a return and pay tax on that income to the source state. The residence state generally will allow credit for the tax paid to the source state, limited to the proportion of the residence state tax that arises from that income.

The only jurisdiction that does not tax nonresidents on source income, other than the reciprocal agreement situations, is the District of Columbia. Under the Home Rule Act, the District cannot tax the earnings of nonresidents from services performed in the District. However, the District does impose an unincorporated business tax on partnerships, LLCs, etc., and nonresident owners of such businesses are not exempt from the UBT. And, oddly enough, the state of Virginia will not allow a resident a credit for the UBT paid to the District.

Katie in San Diego

What about investment income, such as from rental property? Are there any states that have an income tax but would not tax non-residents as to their investment income from that state?

Income from rental property is income from real (or tangible personal) property, not from intangible property. The source of income from real or tangible personal property is the location of the property. There is no state (other than states that do not impose comprehensive individual income taxes) that would not tax a nonresident's income from the rental of real or TPP located in the state.

Income from intangible property (stocks, bonds, patents, copyrights, etc.) generally has its source at the residence of the owner. Thus interest income from a bank account or CD at a bank in the state would not be taxable to a nonresident. Dividends or gain/loss from stock in a business carried on in the state would not be taxable to a nonresident.

There is a usual exception for income from intangibles that have a business situs in the state. For example, income from bank accounts or other investments of a business carried on in the state have their source where the business is carried on.

Katie in San Diego

This is what I was expecting, although it would be nice to add to the number of states without income taxes in this way. Thanks for the info.