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.
Hi Tax Advisor,
So now I am thinking that I wont have to file for IL after all. My husband and I have not established residency in IL such as registering a car, acquiring an IL drivers license/ID card, or registering to vote. We only have been paying rent.
At first, I thought that I needed to change from part time resident to non resident but as a non resident the income must come from IL sources. What does that mean? By the Illinois Department of Revenue website it seems like we need to establish residency (for part time resident) or have income from Illinois sources (for non resident). I am not sure what IL sources means unless it is those companies in IL; all of my income came from Indiana companies.
Thanks again!
Sounds like I should be establishing my residency right away for easier taxes in 2013. I am paying IL taxes this year.
Hi Chicago Crystal,
Yes, if you didn’t establish Illinois residency (and are thus still an Indiana resident) then you need to file a resident return in IN for the whole year. This will tax you on ALL of your income no matter where it was earned.
But it sounds to me like you also need to file a nonresident return in IL. IL source income is any income that you earned while physically in IL. It doesn’t matter where the company is located. Since you said that you worked from a home office in IL, that constitutes IL source income. So you should file a nonresident return on just the income you earned in IL. The same thing we discussed in the last comment about claiming a credit for taxes paid to the other state still applies.
I live in NY, worked as a consultant for a NJ company, but through a NY agency. i was a W2 employee on a job in Minnesota. I paid NY and Minnesota state taxes. I was just laid off and want to know if I can collect NJ unemployment?
Hi Anthony,
This blog is about taxes. I really have no idea if you can collect New Jersey unemployment.
Hi, I am a seasonal worker. I claim NC as my residency. However I worked in Alaska, Colorado, Montana, and got unemployment from NC. My big issue is that the seasonal position I worked for in Alaska sent me my federal wages but obviously no state income tax was taken. However I just filed my taxes and after I did I received (2) W2 Corrected forms from the company in Alaska. One is the W2 that I used for Alaska to be inputed into my federal return- no changes same info I put in. The other W2 corrected form was from same company except it stated NC wages and income was withheld. The amount was different from the other W2. How can NC take taxes out of my Alaska income if I never worked for that company in NC? Do i need to amend a return and put this is in under my federal and NC state or just NC state? Is this going to take money from my return or add to it? Please help so confusing.
Hi lizd812,
Because you are a North Carolina resident, NC is entitled to tax ALL of your income, no matter where it was earned. This includes the income you earned while working in Alaska.
You definitely need to file an amended NC return. Other things being equal, this will likely make your tax bill smaller/make your refund bigger because it will let NC know that you have already paid some of the taxes you owe through withholding.
Whether or not you have to amend your federal return is a bit more complicated. You can take an itemized deduction for state and local income taxes. So if you itemized your deductions, I recommend filing an amended return. If you took the standard deduction, you need to go back and see whether the addition of these state taxes in the itemized deduction column now makes it more valuable for you to itemized deductions as opposed to taking the standard deduction. If you have a relatively simple return with few possible itemized deductions and the amount of state taxes withheld was relatively small, then I don’t think it will make much of a difference. In this case you would not need to file an amended federal return.
Dear Tax Advisor,
My husband and I moved from Indiana to Illinois in August for him to attend school. I kept my job in Indianapolis working from my home office in Illinois. I know we need to file a part time resident return for each state. From what I can tell my employer did not take IL taxes out despite me completing an Illinois W4 in August for my employer.
When I claim income taxed by Indiana on my IL return am I to calculate my income made only August-Dec? If so is this amount before taxes or after? Also when I claim the taxes paid to Indiana, do I only calculate August-Dec?
Thanks!
Hi Chicago Crystal,
I’m not sure what you mean by “claim income taxed by Indiana on my IL return.” You can certainly claim a credit for tax paid to Indiana. However, as far as I understand it, you can only take a credit on income earned while a resident of IL. Take a closer look at Schedule CR and its instructions. I suspect it will answer most of your questions: http://www.revenue.state.il.us/TaxForms/IncmCurrentYear/Individual/Schedule-CR.pdf
I live in SC but work in NC. I usually get some money back from NC and file a SC return that is a 0 net. But will now have a rental property in SC. So does the rental income go on the SC return? I’m assuming so but not really positive.
Hi mike t,
If you are a South Carolina resident, then ALL of your income should go on your SC return, no matter where it was earned. That includes your rental income.