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.
I’m a little confused,
I lived in Illinois, and worked in Iowa, Since i got laid off in November of 2011, I received my unemployment for Jan.2012 and Feb.2012, then I moved to Texas and worked here for the whole year. I’m a little confused on how to go about my taxes since i worked in Texas for 10 months, and the only income recieved from Iowa was two months of unemployment.
It would be very helpful if you replied!!!
Hi Ana,
I’m a little confused about your situation. From your description you make it sound like you moved from Illinois to Texas partway through 2012. If so, then you need to file a part-year resident return in IL. You don’t need to worry about TX because it has no income tax. You also need to worry about Iowa, however. Iowa unemployment benefits are considered Iowa-source income. If you received more than $1,000 of net income from Iowa sources in 2012 then you need to file an IA nonresident return as well.
This is tricky, so here it is, I am a full time resident of the great state of Florida, my company is based in Wisconsin, I work over the internet (VPN) from my home in Florida, I receive a W-2 from my company in Wisconsin. I do not physically travel to Wisconsin at all to work. Should I be paying Wisconsin income tax???, Am I taxed on where I get my W-2, or where I live, and physically do work for my company in Wisconsin
Hi Brian,
Luckily for you, the great state of Florida has no income tax, so you don’t need to worry about that. It also sounds to me like you should not have to file in Wisconsin either. You have to pay taxes to the state where you live and to any state in which you earned money. If you lived in FL all year and did all of your work in FL then you shouldn’t have to file in WI. The one exception to this rule is if WI income taxes were withheld from your pay. If that’s the case, then you have to file a nonresident WI return in order to get that money back.
Hello,
Me and my husband are residents of CA. We paid CA resident state taxes in 2011. We have a rented apartment in CA and I work in CA and worked for the entire 2012 in CA.My husband had to work in New York on a temporary assignment for 8 months in 2012 (april – november) . His employer paid him some business reimbursements to cover his living expenses but it is way below what we had to spend (as he had to rent a studio apartment, take trains every day to work, travel home once a month, meals and entertainment expenses) and way below per diem max stated by the federal government for that area. So can we deduct the actual living expenses minus the business expenses reimbursed from taxable income? We are planning to deduct the following:
1. Rent for the apartment paid during his stay in NY
2. Meals and entertainment expenses upto federal allowed limit for the area he lived in
3. Airfare and taxi charges he paid to come home once a month
4. Train tickets and car mileage commuting to work from his apt
We plan to add all the above expenses and subtract the business expense rebursement that his employer paid. Is that ok?
What all receipts should we retain in case of an audit? We have the records for apartment rent, airfare, taxi charges, train tickets. But we don’t have the receipts for his meals.
I know this is slightly off topic but it would be very helpful if you can reply.
Hi Gowri,
First I just want to issue the caveat that this topic is a little beyond the scope of this article and you might want to consult a tax professional in person because I’m not 100% sure of this advice.
It sounds to me like you can deduct the things you list. I would caution you however that it might not be as simple as totaling the expenses and then subtracting reimbursements. The IRS has different rules depending on how the expenses were reimbursed. I’ve included a link to more information below.
I would just caution you, however, that meals are handled a little differently. Generally you can deduct only 50% of the unreimbursed cost of your meals. You have the choice of either deducting the actual cost of the meal or the standard meal allowance. In this case because you don’t have any receipts for his meals you should use the standard meal allowance, which basically just lets you deduct a set amount for your daily meals and incidental expenses instead of keeping records of the actual cost. Thankfully New York has a higher per diem rate than most of the country. You can find it using the calculator I’ve included below in the links.
You face a similar choice when it comes to car expenses, as you can choose either to deduct the actual expenses or the standard mileage rate.
You should be sure to keep records of everything for at least three years. Also, these are exactly the types of returns that the IRS audits most frequently so I really urge you to sit down with a CPA who can go over your specific situation give you the necessary advice.
Helpful links:
http://www.irs.gov/publications/p463/ch06.html#en_US_2012_publink100034110
http://www.irs.gov/taxtopics/tc511.html
http://www.irs.gov/publications/p463/ch01.html#en_US_2012_publink100033773
http://www.irs.gov/publications/p463/ch01.html#en_US_2012_publink100033781
http://www.irs.gov/publications/p463/ch01.html#en_US_2012_publink100033793
http://www.gsa.gov/portal/content/104877
Hi There,
My question concerns my husband who is an OTR truck driver..his company is based out of AL but we are residents of OK…his employer held out AL taxes but we paid taxes on the income in OK as well…who do we actually have to pay taxes to since he doesnt actually work IN Alabama…and should we get the AL taxes refunded since we paid to OK on the same exact income?
Hi Christina,
You all definitely have to file an Oklahoma resident return. Then you also have to file an Alabama nonresident return. Normally you wouldn’t have to file AL taxes (since he didn’t work there) but in this case you do have to file in order to get the taxes that were withheld back. He should ask his employer to stop withholding AL taxes.
Hi,
I started a job as a Physician Assistant in 2012. I work for a physician group that is based in Ohio. They have contracts with hospitals all over the country. I physically work in two hospitals in Illinois. I live in Indiana. The W2 shows Indiana withholding. Do I need to file in Illinois? I assumed yes, but then thought 1. How would IL even know that I work in Illinois, and 2. How do sales reps file? For example, if you were for a pharmaceutical company, live in one state, but have a territory in another (or even nationwide)….where do you file? It’s a different situation, but I’m curious how you handle the “pay tax where you earn money” rule.
Obviously, I’d love to not pay IL taxes as they have a higher tax rate than IN, but have a feeling that’s what I need to do.Would appreciate your advice. THanks.
Hi Anne,
Yes, you should file a resident return in Indiana and then a nonresident return in Illinois. How IL knows that you work in IL is an open question. I’m sure there are records somewhere of your working in IL. At any rate that’s the law and I can’t rightly advise you to do anything different. As for sales reps, they too must file nonresident returns where they earn their money. Most states have an income threshold for what was earned in that state below which you don’t have to file. So you really have to make quite a bit of money in that state in order to have to file. Also, I wouldn’t be so eager to avoid IL taxes because filing an IL return isn’t really going to cause you to be taxed any more than if you had just filed a IN state return. You will be able to claim a credit for taxes paid to the other state to prevent being double-taxed.