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.
Hello. I live in Washington State and worked for a week in Kentucky during 2016. Kentucky withheld funds for state tax from the one paycheck I earned for that work. Do I have to file an entire non-resident tax return in order to claim those funds? Thanks!
Hello Steve,
You may file a Kentucky Non-Resident return.
Thanks, Robert!
my son is getting ready to go to work in florida but he lives in arkansas. how does the state and federal tax thing work? i know florida does not have a state tax but arkansas has one. how will he be able to fill out his tax forms when the time come for him to do this? thank you and i look forward to your reply.
Your son will be required to file a resident return for Arkansas. Since there is no income tax in FL, he will not have to file a FL state income tax return.
Hi There, I live and work in the state of Minnesota (My end client location), However my employer is based out of Georgia and has withheld GA taxes for me. While filing returns I filed for both Minnesota and Georgia. Should I be getting a Refund from Georgia state Since I do not live or work there, Its just that my employer is based out of there and has filed my taxes for the year in that state. Please advise.
Since your employer withheld taxes for GA, but you lived and worked in Minnesota you are required to file a resident Minnesota and non-resident GA return. This will allow you to receive a resident credit from Minnesota for taxes paid to GA. Therefore, you will avoid being double taxed.
I am moving to Illinois and work in Kentucky. However, the business I work for does not take out Illinois tax. Someone told me that I should pay estimated IL tax quarterly. Is this correct? If not, what should I do? I don’t want to be penalized for not paying taxes come April.
If you are reporting 1099-MISC income information and are self-employed, making quarterly payments throughout the year ensures that you don’t have one large sum to pay off. From the situation, you have outlined, you may need to file a part-year resident return with Illinois and claim the credit for taxes paid to Kentucky. It would be best for you to speak with your employer or the payroll department within your company.
The company I work for has an employee with a residence in Colorado but works in Oregon. The company is located in Oregon. Should I withhold OR state taxes for the employee or CO? I found this blurb on the CO DR1098 publication and want to make sure I’m interpreting it correctly:
A Colorado resident employee who works in another
state may be excused from Colorado withholding on wages if income tax is withheld for the other state from
those wages.
Thank you!
If you choose to file your employee’s taxes in Colorado for them, they would only need to process a full-year resident CO return. However, if you do choose to withhold the taxes from Oregon instead, they will need to file a full-year resident CO return with a non-resident OR return to receive an allocated full-year resident non-refundable credit to prevent double taxation. It would be best if you consult with a local CPA or tax accountant for more advisement.