Need to file state taxes when you live and work in different states?
Most people in the U.S. live and work in the same state, which makes state taxes pretty easy to understand – you pay taxes to the state where you live and work.
But what if you live in one state and work in another? Do you pay taxes to the state where you live? Where you earn an income? Both?!
You need to pay taxes to both. Most likely you will end up having to file a resident return in the state where you live and a nonresident return in the state where you work.
Resident return
Generally you need to file a resident return in the state where you are a permanent resident. This state has the right to tax ALL of your income, wherever it was earned.
Nonresident return
After you file your resident return in your home state, you then need to go about filing a nonresident return in every other state where you earned money. A nonresident return only taxes you on the money you earned in that state. What often happens is that you withhold some income for each state tax.
Let’s take a real-world example.
Let’s say you live in New Jersey and commute to your NYC job Monday through Friday. Come tax time, you would need to file a resident return in NJ (reporting all of your income) and a nonresident return in NY (reporting only the income you earned in NY).
Worried about being double-taxed? Don’t be. You will have an opportunity to claim a credit for taxes paid to the nonresident state. They will then divide whatever has been withheld between them and the state whose tax liability was not exactly met will either give you a refund or a tax bill.
States without an income tax
There’s always an exception to the rule. In this case, there are seven exceptions. The five states with no income tax and the two states that only tax interest and dividends are the exclusions:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
- Tennessee
- New Hampshire
If you live in one of these states, you don’t need to file a resident return (unless you live in TN or NH and have interest and dividends income). But if you work in a state that does have an income tax you have to file a nonresident return in that state.
The same holds true when the situation is reversed. If you live in a state with an income tax, you must file a resident return there. But if you work in a state without an income tax, you don’t have to worry about filing a nonresident return.
Sound complicated? There’s a reason for that: it is. But let’s not stress because here’s all you really need to know. For this to work, every state needs to make agreements with every other state covering the income they could both theoretically tax. These agreements are structured to generate a minimum amount of paperwork and special cases: instead of having some workers who lives in a state but doesn’t pay taxes, the states have someone who lives in the state and pays taxes like everyone else — but gets a special tax credit at the end of the year.
In a situation like this, it’s often best to talk to your payroll department about how to proceed. In places with many out-of-state commuters (like New York, New Jersey, and Connecticut, as well as cities near state borders), they will have the details on how each state treats out-of-state income.
Even if you have to file multiple state tax returns you can take care of them right here on RapidTax.
I live in Florida but did some side work for a company in Massachusetts. I did not physically work in Mass, I did the work remotely from Florida. I know I have to claim the contract income on my Fed tax – do I need to fill out a Mass Tax Return, or no since I didn’t actually work IN Massachusetts?
Thank you!
Hi Dawn,
If you’re not a Massachusetts resident, then as long as you’re not physically present in Massachusetts, you do not owe Massachusetts taxes on compensation for your services.
My entire income for 2015 was earned in NY, however I lived in NJ from January to June and moved to Georgia in June and continue working in NY. I commute on the weekends to Georgia, my license and vehicle registration as well as voter registration is in Georgia.
What state returns do i need to file and what are me status for each?
Thanks
Hi Sandra,
Along with your federal tax return, you will need to file a non-resident tax return for NY. You will then file a part-year resident tax return for GA and another part-year return for NJ. For each state tax return, you will be asked to report the amount of time you lived in each state. Once you do this, your tax will adjust accordingly.
Ok I live in Indiana but work in Kentucky. My employer isn’t taking out any state tax out since I am the only employee in Indiana. How would I go about filing my taxes next year?
Hi Julie,
You will file a resident state tax return for Indiana and a non-resident state tax return for Kentucky. On your state tax returns, you will report the income earned while living or working in the state(s). All income is reported on your resident state tax return and your federal return.
Hi and thanks for the pointer…
I have done some digging and scrutinized the severence agreements.
The severence was not accrued for time served, it was a payment I would be “not otherwise entitled to receive”, the agreement was signed after my departure from the company and on the first date of living in NV. I did receive my agreed severence separately during my time in NY, paid tax and of course haven’t reclaimed tax on that.
Furthermore having read (& tried to understand) the NY special accruals rules the payment is tied to stipulations which occur post move to NV. i.e. Maintaining confidentiality, release of claims, return of company property.
So I am making the assumption that it was not accrued during the time I was living in NY and in fact for stipulations which I complied while living in NV.
I still expect a potential audit, but on the face of the above I think I have a case to state, right?
Hi,
I received a severence payment ‘representing 3 months salary’ for a role based in NYC. The payment came with provisos for non compete, waiving rights to legal claims etc.
On leaving the company I immediately moved from NY city to Nevada and the severance payment was paid and received after my move to NV.
The company deducted NY state taxes but I wish to claim this state tax as a refund and pay NV state tax (i.e. Zero). Is this assumption correct?
Thanks.
Also, my last day in the role was 12/31 so the severance is in the following tax year.
Hi Dave,
As I’m sure you already know, NY income tax is pretty brutal. New York state does tax nonresident severance pay if it accrues over time. For example, if you earn one week of severance pay for each year you work in New York, the state will tax that income when you collect it.