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.
Hi,
I am a Florida resident and will be working in Texas. Any additional procedures for filing my income tax?
Hi John,
Since neither of those states have an income tax, you shouldn’t have to worry about state taxes at all.
I live in Nashua, NH. I am going to work for a company in Minnesota. The controller told me that they are NOT set up to handle an out-of-state employment. I do not understand his comment. He wants to pay me via a 1099. I have worked for many out-of-state comapnies and they never had this problem. The controller wants to pick my brain for some ideas on how he can handle it. I honestly do not see the problem of taking Fed Tax and Social Security out of my wages. NH has no state income tax. What do you recommend on how the controller can handle it?
Thank you.
Hi Paul from Nashua,
As a tax filing company we don’t really deal with the withholding side of things, but this does sound a little ridiculous. As you pointed out, New Hampshire wouldn’t even factor in to the situation as there’s no income tax, so they would just have to worry about federal withholding and possibly Minnesota, which they would have to do for all of their other employees anyway. If I had to guess, I would say this sounds like an excuse for not making you an employee (and all of the obligations that comes with) and just keeping you as an independent contractor on a 1099.
I live in NH and considering a job in Vermont. I would have to file a nonresident tax form for the income earned in Vermont. Can I get a credit or refund for this situation on taxes paid to this state?
Hi Glenn,
Normally taxpayers can claim a credit for taxes paid to another state on their resident state’s return. But because New Hampshire doesn’t have a state income tax you won’t be able to do this. You can also claim state taxes on your federal return, but only as an itemized deduction – http://www.irs.gov/taxtopics/tc503.html
Hi All,
I moved to WI to my spouse’s place from Texas and work remotely for Madison WI for the same company in Dallas TX. Can i still claim Texas state tax benefit as my company is in Dallas TX or should i pay taxes to WI. My another question is i commute to my Dallas office once every month and all the expenses are to be paid by self . Can i claim any tax benefit for these non reimbursed expenses and can i claim any tax benefit for the non reimbursable office supplies and my work place as i use a portion of my home as my office
Hi Dave,
1) You do have to pay taxes to Wisconsin even if your company is located in Texas. How you are taxed depends on whether you are a WI resident. If you are, you will have to file a resident return and pay taxes on all your income. If you are still a TX resident, technically you have to file a nonresident return in WI and pay tax only on the income you earn in WI.
2) You can find more about deductible travel expenses here – http://www.irs.gov/taxtopics/tc511.html
3) And you can find more about the home office deduction here – http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction
I live in Texas but receive unemployment benefits from Illinois – Do I have to pay income tax to Illinois on the unemployment benefits that I receive from Illinois while I am a resident of Texas??
Hi Al,
Yes, even though you are a resident of Texas, unemployment compensation you receive from the Illinois Department of Employment Security is taxable by IL. You can find more information here on the Schedule NR IL-1040 Instructions: http://www.revenue.state.il.us/taxforms/incmcurrentyear/individual/schedule-nr-instr.pdf