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.
If I live aboard a sailboat on the Hudson river, will I avoid paying city and state tax while I work in New York City?? I am planning on living aboard full-time. I lived aboard my boat in DC while I worked there but never checked into the savings cause I also had an apartment. In NYC, I will only live on the boat. The reason I ask is because I heard rumor that people living aboard their boats on the hudson full-time avoid paying city taxes.
thanks
Hi Nathan,
This is truly a first for me and I have no idea. I imagine it would come down to where your permanent address is. Do you have mail delivered to the boat with a NYC address? I honestly have no idea.
I live in Texas (no state tax) but worked in Oregon last year (state Tax) I am not an Oregon resident. My Company held out Oregon state tax but not enough. Do I have to pay Oregon taxes or can I file as a non resident? This is a temporary assignment as my job requires me to travel
Hi Greg,
If you are a Texas resident who earned money in Oregon then you have to file an OR nonresident return, no matter how much money was withheld. You will certainly have to pay tax on the income that you earned in OR.
Moved full time to VA in Dec 2011. Had a final compensation payment from NJ in Jan 2012 and had $700+ held in NJ state tax. It was my understanding that that money would be returned to me and I would then submit this plus the rest of my 2012 state tax to VA.Had my accountant that I have used for years in NJ do my forms and now I owe an additional $700+ dollars to NJ even though I live here in VA. I checked and VA does tax out of state pensions. I’m thinking that even though this guy is very reputable, he may not be understanding out of state regulations. He also told me that in the future I would not owe VA. My pension currently only takes out federal. Am I missing something or is he wrong like I think?
Hi Patrick L,
I want to warn you at the beginning that I’m not too familiar with how pensions are taxed. What I can tell you, however, is that you have to file a resident return in Virginia that taxes you on all of your income no matter where it comes from (which I think you already know). But just because you are now a resident of VA doesn’t mean that you don’t have any New Jersey tax obligations. NJ nonresidents are responsible for paying tax on all of their NJ source income. I’m not 100% sure but I think a pension from NJ counts as NJ source income. In that case, you would owe some tax to NJ. Whether it’s going to be more or less than $1,400 I can’t tell you, but don’t think you’re just going to get back everything that was withheld from NJ.
Hello,
I’m currently entertaining the idea to my employer in Florida to let me live and work remotely in Arizona. When it comes down to tax time, the only taxes I will have to pay would be to Arizona, correct? Is there any negative reasons that would keep the company from allowing me to do so? Nexus, paying AZ state taxes for the company, etc? Thank you.
Hi Ryan C.,
Yes, if you lived and worked in Arizona you would have to file an AZ resident tax return. As for reasons why the company wouldn’t let you do this, I really can’t say. I’m not that familiar with business tax laws/regulations, and it gets even more complicated because every state has their own rules.
Hello,
I live in Arizona and work from home and onsite in Arizona, but my employer is based in Utah. They have me currently paying Utah taxes. Is this correct or should I be considered working in AZ since that’s what I’m doing.
Thank you!
Hi Jordan S,
They should not be withholding Utah taxes. Since you live and work entirely in Arizona you are only obligated to pay AZ income taxes. You should ask your employer to stop withholding UT taxes and start withholding AZ taxes. However, since UT taxes have already been withheld, you will need to file a UT nonresident return in order to get that money back.