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.
Thanks Tax Advisor for answering my questions.
Hi tax advisor,
Great forum and article – thank you in advance for answering my questions!
I have just accepted a job in MA. My husband works in NY and we own a home in NJ. I will be moving to MA and my husband will live in our home in NJ. We plan to alternate weekends in MA and in NJ and extend those weekends with telecommuting… For example, the weekend he comes to MA and he will works from home or Boston office on Thurs and Fri and the next weekend I will do the same from Jersey. My questions:
1. Should I transfer my residence to MA? (I’m signing a 12 month lease on an apt.) If yes, what are the implications on the property I own with my husband in NJ?
2. Should my husband transfer his residence to NJ? (He will be on the MA lease as well unless you advise otherwise.)
3. So, in reading everything here, what I think we may need to file is…. A. NY nonresident for my husband, B. NJ nonresident for both of us if you think it’s a good idea for my husband to transfer residency to MA, and C. MA resident for both of us. Is that right? And is that the wisest choice financially?
Thank you so much!!
Mudra
Hi Mudra,
I imagine that you should transfer your residency to Massachusetts. I don’t think there’s really going to be any great tax benefit since MA and New Jersey are both such high-taxing states, but you don’t want the state coming after you if you meet their definition of a resident and don’t file a resident return. You can take a look at the official definition here. It sounds to me like you’ll meet them – http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/residency-status.html#FullYear. As for your property in NJ, I’m not really sure what the tax implications will be as I don’t deal with property taxes, but I imagine you’re not going to avoid paying NJ property taxes.
As for your husband’s residency, why isn’t he a NJ resident already? You made it sound as if he lived in NJ and commutes to NY. You can’t exactly pick and choose your residency. If his permanent home is in New Jersey then he is a NJ resident. I don’t think he’s going to qualify as a MA resident, especially since you’ll be going down to NJ to visit him, which implies that he is a resident of NJ.
This is what is sounds like you should file. Naturally I’m not acquainted with your situation entirely and so this may not be exact. But I think you need to file a resident return in MA and then a nonresident return in NJ since you are earning money there when you telecommute while visiting your husband. Then your husband will most likely need to file a NJ resident return and then a nonresident return in NY since he works there, and then a nonresident return in MA as well since he’s doing work there when he visits you.
If you’re looking to squeeze the most money out of this situation I suggest sitting down with a tax accountant who can really hammer this out with you. Do note however that when you file multiple returns like this you have the opportunity to claim a credit for taxes paid to other states so theoretically you won’t be double-taxed.
Hi Tax Advisor,
I live in Canada. I have been working remotely for a company in California. They issue me a W-2 for 2012 and in box 16, all of my salary is reported as CA salary. I am wondering if this is correct. I talked to California FTB and was told that my salary is not considered CA-sourced, because the job was performed outside of California. Before I talk to the payroll, I want to make sure my understanding is correct. Should I ask for a corrected w-2 showing zero CA salary in box 16?
Hi Kevin,
The California FTB is correct. If you were living in Canada the whole time and did all of your work in Canada, then none of your income should be considered CA source income. In this case you wouldn’t have to file a CA return. Do note, though, that if any CA taxes were withheld from your pay you’ll have to file in order to get it back.
Hi Tax Advisor,
So do you mean to say that I do not need to file a Virginia return sice no VA taxes were withheld which is accurately reflected in my W2? Or should I still go and file the VA tax return with my current W2? Thanks again for answering my questions.
Hi Arpit,
If you were a resident of Virginia, or you earned money in VA, you need to file a VA return, regardless of what your W-2 says. Often state taxes are not accurately withheld on W-2s.
I’m filing my tax today and before sending it in I noticed I owe a lot of money on my resident side state. I work in Pennsylvania but I live in New York. I followed all the instructions both the e-filing and what’s on my W2. The thing is the program states I owe New York over 1k in tax but I owe nothing for Pennsylvania. I’m curious is it because it thinks I was making an earning in New York and not meeting the tax requirement which in turn become as an under payment or do I actually owe them that much? I did not work in my resident state for over a year and all has been done in the non-resident state which would be Pennsylvania.
Hi Matthew,
First off, your resident state (in this case New York) has a right to tax ALL of your income, whether it was earned in NY or not. So most likely you will end up owing some money to NY. More than this, I really can’t tell you whether this sounds right or not because it largely depends on how much state tax was withheld from your pay over the course of the year. If nothing was withheld you will owe a large amount, and if too much was withheld you’ll get a refund. Also make sure that if any PA taxes were withheld that you are claiming the credit on your NY return for taxes paid to another state.