How 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 that same 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 or the state where you make your money?
That answer is that 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.
Let’s take a real-world example. What often happens is that you withhold some income for each state tax. Let’s say you live in New Jersey and every day you commute to your job in New York. In this case you would need to file a resident return in NJ (on all of your income) and a nonresident return in NY (only on the income you earned in NY).
Don’t worry about being double taxed. You will have an opportunity to claim a credit for taxes paid to the other state. They will then divide whatever has been withheld between them and at the end the state whose liability was not exactly met will either give you a refund or a tax bill.
States without an income tax
The exception to all this are the seven states without an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition Tennessee and New Hampshire tax only interest and dividends.
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.
If it sounds complex, there’s a reason for that: it is. 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.
