I live and work in PA, but my employer is in NY state and withheld NY state taxes. Do I need a state return filed for both states?

[SweetieJean]

Do you telecommute for the NY company?

[Bill-Davenport]

Yes, I telecommute for the NY company.

[Bill-Davenport]

To clarify telecommuting, I work solely from home and don't go to NY.

[re2boys · Accepted solution]

Basically, per SweetieJean's references, NY considers your income as NY sourced as the employer doesn't care where you are when performing the work and they have won the argument in court.

After preparing your federal return, you will then need to prepare a NY non-resident return reporting only your NY sourced income.

Then prepare a PA resident income tax return reporting ALL income, regardless of where earned.  Be sure the PA return contains a Schedule G where you receive a credit for taxes paid to another state (NY) to eliminate double taxation.  Do the PA return in TurboTax last, otherwise the credit will not flow properly.

Finally, prepare your PA local earned income tax return for your local municipality.  All earned income, including your NY W2 income is reported.  TurboTax does not prepare this return.  Note, that if you pay $50 in NY taxes (as an example)  but your PA credit is only $40 (this can happen as NY generally has a higher tax rate than PA), you can apply the remaining $10 as a credit on you local return (attach a copy of your PA Schedule G with copies of all W2s to the local return)..

[Bill-Davenport]

re2boys, thank you for the excellent, detailed response. I could not have asked for more in a rely. Thank you !!! Now, I can go ahead with confidence through the process.

[re2boys]

Your welcome!

[msvoysky]

re2boys, thank you for such detailed explanation. Could you please specify if TurboTax online supports both NY nonresidential and PA residential tax returnes? Or TurboTax CD version is the better solution?

[re2boys]

There will be an additional charge for the second state software regardless of the product.  Some online products charge extra for the first state.
 Myself, I much prefer the CD/download product as the difference between these is one of how much help you get, they all have the same forms available ( and I do mine, two sons, brother's family with two college children, etc..).  If you have a CD drive on your computer, you can find a CD of deluxe version on sale on-line or retail outlets.
Just stay organized, be sure to print out a copy of your return for your records, and don't count on TT to store your past returns for free.

[Bill-Davenport]

A very concise and thorough answer -- thanks!

[msvoysky]

I have never had such clear and practical instruction regarding the matter. Thank you.

[mcchristie]

So based on this conversation thread, we are not double taxed or penalized financially for working in one state and living in another.

[re2boys]

When you get the credit by your home state for income earned in the other state, your home state is not double taxing you on that income.  
But....as far as this income goes, you will end up paying state taxes at the highest state rate for that income level.  For example, if you earn $10,000 in NY and NY taxes at one rate and PA at a different rate, you end up paying the higher rate.

[Bill-Davenport]

Thank you for your reply. I've received sufficient answers to my questions.

[SweetieJean]

https://www.thetaxadviser.com/issues/2010/feb/apractitionersguidetothetaxationoftelecommuting.html

http://www.koscpa.com/newsletter-article/state-tax-consequences-telecommuting/