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 have a bit of an interesting and complex tax situation this year that I would love some guidance on. I lived in Alabama and worked as a full-time exempt employee. In April, I moved to Florida (as you know, no income tax), and continued to work for the same company remotely in a part-time non-exempt consultant role (with the same W4/A4 exemptions). While I was in Alabama, I also had a role as an Adjunct Professor but this was all completed while in Alabama with normal tax deductions. In addition to my role as a Human Resource Leader, I have my own Human Resource Consulting and Professional Resume Writing company that I do a lot of 1099-contracting work with. Obviously this has not been taxed yet, and almost all of this income was earned after I moved to Florida. On top of all of that, I got married in September and my husband wants us to file jointly and he’s in the same boat as far as working in Alabama for a few months then working the rest of the year in Florida. Also, I do still own a home in Alabama and we own a home here in Florida.
So my main questions are what all forms do I need to file and can I file an exemption from Alabama taxes from my Alabama employer in this new year since I am not a resident or would that result in my owning Alabama taxes at the end of next year.
Thanks you so much!
Hi Kayla,
It sounds to me like when you moved from Alabama to Florida you stopped being a resident of AL and became a resident of FL. If that’s true, you will have to file a part-year resident return in AL. This will tax you on all of your income for that portion of the year that you lived in AL.
If you remained a resident of AL even after you moved to FL, you will have to file a resident return in AL that taxes you on all of your income.
Residency is often subjective (and I suggest checking the tax authority websites of the two states) but it sounds to me like you are now a FL resident and will thus have to file a part-year resident return in AL.
If after you moved to FL you did not return and do any work in AL then you don’t have to worry about paying any AL tax. You will only owe AL tax on your income if you physically earned that income in AL. If all of your income after you moved was earned in FL then you don’t have to worry about paying taxes on it.
As for your withholding, if you are now a permanent FL resident and aren’t going to return to AL then I don’t think there’s any reason to have AL taxes withheld from your paychecks.
Given the complexity, I strongly encourage you to sit down with a tax professionals to really sort through this on a more specific basis. Also note that even if you and your husband file a joint federal return, you can still file separate state returns.
Hi I am permanent resident of Florida and would be working in Virginia for this year 2013 on a contract for 6 – 12 months? Do I need to file any type of returns for Virginia> Thanks
Hi P,
Yes, you will need to file a return in Virginia. Most likely I think you will still be considered a resident of Florida, in which case you will need to file a nonresident return in VA that taxes you only on the income you earned in VA.
Because you’re going to be there so long you should check the VA residency rules however, to make sure you don’t qualify as a resident. In that case you would have to file a part-year resident return in VA: http://www.tax.virginia.gov/site.cfm?alias=ResidencyStatus
Hello, I just found this site and I think it is awesome. I have a question. I was laid off in March 2012 and had to cash in my 401 which I was penalized ( I knew I would be) and then I am going to be taxed again when I file my taxes. Someone told me that since I had to cash it in due to “hardship” that I would not be taxed again because of the reason for cashing it out? Is this true? I personally haven’t heard of this before but I couldn’t make it on unemployment. Thanks for your time
Hi Gina,
I really don’t know much about retirement plans, but this page from the IRS might be helpful: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions.
In particular, I would direct your attention to this paragraph: “Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee’s account balance under the plan.”
Hello again. I wanted to clarify my previous question. I want to know if I will be paying taxes in California or Texas in 2014 when I am living in Texas full-time. I realize that they will be split this year since I will have lived in California for 6 months and Texas for 6 months, but what about after that, when I am living in Texas full-time and have left California permanently? Thank you again!
Hello! I just purchased a company (no store front) that I have worked at for the last 10 years. This company is based in California and it has been changed from a “Corporation” to a “Sole Proprietor” with myself as the owner. I have all of the required business licenses, contractor’s license, bank account, etc… I am planning on moving to Texas this summer and am planning on running this business from Texas with one full-time employee working in California. All revenue will come from California customers. This business involves an employee (and at times a sub-contractor) testing water systems and forwarding all paperwork to me to process and send invoices. Would I pay tax in California or Texas? Thank you in advance!
Hi April,
First of all Texas has no income tax, so you will be able to avoid filing a resident return and you won’t have to pay taxes to that state.
So the question becomes whether you have to file a nonresident return in California. I know that if you were an ordinary employee you would only have to pay taxes in CA if you physically did work in CA. But I think that a trade or business that operates in CA is considered CA source income and so you’ll have to file a nonresident return in CA only on the income you earn there. But I’m not 100% positive about this. I would check with a tax adviser in CA who is accustomed to dealing with business issues.