The United States of America has entered into income tax treaties with various other foreign countries. The rationale behind these treaties are to ensure that the residents (not mandatorily citizens) of foreign countries are taxed at a comparatively abridged rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Reciprocal income tax agreement is yet another proposition through treaty agreement between sister states of the United States by which income earned is taxed in the State of residence rather than the State of origin of income. In brief, reciprocal income tax agreements allow residents of one state to work in a neighboring state allowing them to pay income taxes to their state of residency. Reciprocal agreements simplify tax …show more content…
Usually, reciprocal agreements are confined to compensation, such as wages, salaries, tips, commissions, and bonuses a taxpayer receives for personal and professional services. The State is privileged to provide exemptions to specific types of income interalia including income earned through lottery winning etc. Reciprocal agreement also known as reciprocity is an agreement by which one state will not tax the other’s resident on employee compensation that is subject to employer withholding. An important aspect of reciprocal agreement is that it applies only to compensation and withholding, it does not apply to any other class of income. By reciprocal agreement he/she has to pay taxes to the state where he/she lives. Such a treaty agreement is no doubt a win- win situation for both public employees as well as the State as it helps the tax payers for employees in deploying the sum for other productive