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.
Thank you… This is one form. I entered the 2 state as 2 entries but somehow the IL state rejected my e-filing. It is very strange.
Hi Advisor –
I work in a tax free state – New Hampshire. (lived there as well)
I bought a secondary residence in New York State in 2011.
This past month I have changed legal residency to NYS but I’m still working in NH and have a residence there.
My employer has started to take out NYS income tax from my paycheck.
Are New York State residents taxed on all income, including that earned out of the state?
Hi Don,
All states with an income tax tax their residents on all of their income regardless of where it was earned, not just New York. Only nonresidents are taxed on the income they earn in that particular state.
Hi Advisor,
I live in Chicago IL, worked for a consulting company with projects in NY. I received a W2 with 2 pages: 1 page with my fed and state info showing IL income (equal to total fed income) and IL tax; the 2nd page with same info for fed but NY income (same as in IL income) and a NY state income tax. I am concerned that this will show 100% working in Il and 100% working in NY at the same time. If I enter this as 2 separate W2, would that double my fed income? If I enter as a second entry for box 15-17 on my return W2, wouldn’t the state income for each state be incorrect and over-stated? Should I proportion the income and adjust the W2’s?
Hi Mike,
From what you’ve described, this does not sound like two separate W-2s. If it’s one form from one employer then do not enter it as two separate forms. This would indeed double your income and would be very bad for your tax liability. As for the state tax situation, did you earn any income in Illinois? If not, then your income in each state should be the same. Since you live in IL, you will have to file as an IL resident. In your resident state, you are taxed on all income, regardless of what state you earned it in. In NY you will file as a nonresident and you will only be taxed on the income you earned in NY. If all your income was earned in NY, however, then both IL and NY will appear to be taxing the same amount of income and it may seem like you are being “double taxed.” Don’t worry. When filing state returns you can claim the amount of tax you pay to other states and the tax you owe that state will be adjusted accordingly.
I live in Illinois and was sent on an assignment to Houston texas for about 11 months, during which I was not deducted Illinios State Tax. I know that texas does not have a State Tax but Illinois does. Should I pay Illinois tax while filling the Tax Returns as I am a resident of Illinois?
Hi David,
Yes, you must file an Illinois tax return. In your resident state (in this case IL) you are taxed on all of your income, regardless of where you earned it.
I love in California . Working in Oklahoma . How do o file??
Hi Juan,
You need to file taxes as a resident in California and as a nonresident in Oklahoma.