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.
Hello,
I am from California, but currently live and work in Hong Kong for a Hong Kong company and am exempted from tax because my income falls below the foreign exclusion.
At the same time, I am also freelancing several hours a week for a company in Georgia, so I’m a bit confused as to where I would need to file, as I have been living in Hong Kong for 3 years now. Thanks!
Hi Kevin,
At this point, it is safe to say that you are no longer a resident of California based on what you have stated above. However, I suggest contacting the company in GA that you are employed by to see if you are having taxes withheld from that state. If so, you will file a non-resident GA state tax 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.
I currently live and work in TX and will be moving permanently to AZ next month. I plan to do some seasonal fulltime work in AZ while working my at home based job out of TX. My question is since PLAN to have two jobs from two different states, how will I go about filing this for so there’s no issue during tax time? Thanks so much in advance!
“I plan to do some seasonal fulltime work in AZ while working my at home based job out of TX.”
I MEANT to say my at home based job from TX.
Hi Gigi,
You will always be taxed in the state where you are a resident and the state where you physically work. There are some exceptions of states with no income tax; Texas being one of them. Once you move to AZ, you will need to start filing state resident returns each year. For filing this year, you will meed to file a part-year resident return for AZ and report how long you lived there for and the income you made while working there.
Also, you may want to speak with your pay roll department in Texas. Generally, one is taxed where they are a resident and where they physically work (not where the company they work for is based).
All in all, at the end of the tax year, you are responsible for filing for the states reported on the W-2 you receive from your employer.
Thanks you so much for all of your great advice. My wife is looking at accepting a job for a company in California, but will be working from home here in utah (other than perhaps a trip once every month or two to the headquarters). Does she need to withhold or pay taxes in California? Thanks
Hi Andre,
You will always be taxed in the states in which you live and physically work. However, if you receive your W2 and only one state is listed, then you are only responsible for filing a state return with that state.
I suggest that your wife speak with her payroll department so that they can shed some more light on this.
Hello,
I’m working on a research paper for Kansas State University about the income tax changes recently applied to KS. I was wondering, for example, if someone living in Missouri who owned a small business in MO wanted to realize the lower income tax rates in Kansas, would they have to only move their business to KS, only move to KS, or both move their business and themselves to KS? Or where would I be able to find this information. Thanks for the help!
Brandon
Hi Brandon,
Great topic!
When one owns a company, they are generally taxed where they live, work and in the state where the company that they own is based.
I suggest contacting or taking a look at each state’s government website to get a bit more insight.