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Illinois and Missouri Reach Reciprocal Agreement on Income Tax for Remote Workers
Residents of Illinois and Missouri who work from home for employers in the other state will soon face less complexity and potentially lower tax bills thanks to a new reciprocal agreement announced by the two states. The agreement, which takes effect on January 1, 2022, allows eligible employees to avoid double taxation and shift the tax burden to their state of residence.
According to the official announcement by the Illinois Department of Revenue and the Missouri Department of Revenue, the reciprocal agreement applies to nonresident individuals who live in one state and work remotely for an employer in the other state on a temporary or occasional basis. Before the agreement, these individuals were often subject to filing income tax returns in both states, which could lead to additional costs and confusion.
Now, qualified workers will be allowed to claim a credit for income tax paid to their state of work on their resident state tax return, up to the amount of tax they would owe if all their income was taxed by their state of residence. For example, if an Illinois resident works from home for a Missouri employer and pays $1,000 in Missouri income tax, they can reduce their Illinois income tax by up to $1,000. Conversely, if a Missouri resident works remotely for an Illinois employer and pays $1,000 in Illinois income tax, they can reduce their Missouri income tax by up to $1,000.
The reciprocal agreement aims to simplify compliance for taxpayers and reduce administrative costs for both states, which are among the few states that allow local governments to impose income taxes. The agreement will also help prevent double taxation of the same income, which can discourage cross-border employment and create disincentives for businesses and workers.
The reciprocal agreement has some limitations and conditions that taxpayers should be aware of. For example, it only covers wages, salaries, tips, and commissions, not other types of income such as self-employment income, rental income, or capital gains. Additionally, taxpayers must meet certain requirements to qualify for the credit, such as filing a nonresident income tax return in the state of work and maintaining proper documentation.
To benefit from the reciprocal agreement, eligible taxpayers should update their withholding forms and tax returns for 2022 and consult with their tax advisors or software providers if needed. The agreement is expected to benefit thousands of workers who reside in Illinois and work for companies in St. Louis or other parts of Missouri, and vice versa.
Overall, the reciprocal agreement between Illinois and Missouri reflects a growing trend of states adapting their tax policies to the changing nature of work and the pandemic-induced rise of remote work. By cooperating to streamline their tax systems and reduce friction for cross-border workers, the two states demonstrate a commitment to promoting regional economic growth and competitiveness.