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 currently own my company (group of collegues provide service to a company). I work in Texas, but a resident in Indiana. I stay mostly in Texas, that is have an apartment here, actually live here. I’m about to relocate but till the end of the year. As an owner of my company, do I need to pay income taxes to indiana? If yes…why do some of my colleagues avoid paying income taxes to their repective state just because their company is registered as LLC or coporation.
Hi Sam,
I’m really not well versed in the tax aspects of owning a business, but I can tell you as long as you are a permanent resident of Indiana you are going to owe them taxes on your personal income. I have no idea how your friends are avoiding taxes – or if that’s even legal.
We live in florida and my husband’s employer is in nyc. He is the only one in florida and does travel nationwide. Does he need to pay NY taxes?
Hi Jen,
He only needs to pay New York taxes if he physically travels to NY to do work. He does not need to file NY taxes just because his employer is located there.
Thanks for the reply. I filed in Minnesota, California and Louisiana when I was working in those states. I haven’t had an Oregon license for many years, well before 2008. I had a California for several years then I got a Texas license in 2009. I still have the Texas license. I voted in the 2010 election in Texas and was called twice to serve on a jury. So how do I respond to these letters? Is it sufficient to tell them where I was living and working or do I need to have information from my employer and the places where I lived to prove it.
Hi Jerry,
I’m not sure exactly what evidence they will require of you. The best thing to do is just to call them and explain your situation. I’m sure they’ll tell you what information they need.
I grew up and lived and worked in California till 1995. I was transferred to Oregon and lived there till I got a divorce in 1997. After that I worked all over the country on different projects. I bought a house in Oregon in 2009 for my daughter and husband to live. I had been helping them rent a house and this seemed to make financial sense. I was working in Texas when I bought the house. I then worked in Louisiana for a year and then was sent to our office in Houston for a permanent assignment. I visited my daughter about twice a year for a total of less than two weeks. I had not lived in Oregon for years and never planned to again.
Recently an opportunity presented itself to work for another company that didn’t care where I worked, I am an estimator and so I took the job and am now working in Oregon.
I just got four letters from Oregon Department of Revenue wanting to know why I had not filed from 2008 to 2011.
I just read residency requirements and I don’t meet them, I didn’t consider myself a resident, I sure didn’t live there or work there.
I think where I screwed up is putting the Oregon address on my federal returns after I bought the house. I just did it because I moved constantly and this was an address that wouldn’t change. I wasn’t trying to hide anything, I still don’t think it made me an Oregon resident.
Hi Jerry,
You did the right thing by reading through the residency requirements. If you really don’t meet them, you’ll have to get in contact with the Oregon Department of Revenue and make this case. Did you file as a resident anywhere else (I know TX has no income tax, but maybe LA?) Did you transfer your drivers license to a different state, did you register to vote somewhere else? These are the types of things that will decide whether you were a resident. If you’re still using an OR drivers license etc. they might actually be able to make the case that you were an OR resident.
Another point to mention is both W2’s only had MA state income tax withheld.