If you live and/or work in more than one state, how do you
determine your state income taxes? TurboTax can help you calculate the taxes
you owe to different states.
How do I know how much I owe in each state?
Residents pay tax on all of the income (from all sources) they
received during the calendar year. Residents get a tax credit for taxes paid to
any other states.
Example: A California resident receives $20,000 from a rental
building in Arkansas. The resident reports only the $20,000
to Arkansas and pays $2,000 in tax to Arkansas. Since the person is a
California resident, California also taxes the $20,000, but gives a $2,000 tax
credit for the tax you paid to Arkansas.
Part-year residents follow each state's rules. Some states
separate the income, and tax only their state's income. Or a state may
calculate the tax on all income as if you were a resident, and then
allocate the tax based on "in state sources/all sources."
Figuring the apportionment percentage
Regardless of whether you're a part-year resident or a
nonresident in the state where you are working, you will probably need to
complete an apportionment schedule. This
form can usually be found in the state's part-year or nonresident income tax
return. You use the schedule to "apportion" how much of your income
is taxable in each state.
- Part-year residents not only
pay tax on income earned from work performed in the state, but also pay
tax on all other income received while residing in the state.
- Nonresidents generally only
pay tax on income they earned from work performed in the state, and on
income received from other sources within the state.
After you use the apportionment schedule to allocate the
appropriate amount of your income and deductions to the new state, you need to
calculate what percentage of your total income is state income. We'll call this
the "apportionment percentage," and it is used in the rest of the
calculations.
For example, if your total income was $50,000 and you earned
$30,000 in a second state where you moved during the year, your apportionment
percentage is 30,000 divided by 50,000, or 60 percent.
You generally use the apportionment percentage in one of two
common methods to calculate your state income tax.
Common Method 1
Some states require you to calculate your tax as if you were a
resident in the state for the entire year. In other words, you determine your
state's taxable income as if you were a full-year resident and calculate a full
year's state tax on this taxable income. You then apply the apportionment
percentage to this tax to determine the tax you owe in the new state.
Common Method 2
Other states require you to prorate your itemized deductions,
personal exemptions and certain other allowable deductions and credits using
your apportionment percentage, so the taxes you pay to the new state are based
on this prorated amount.
What do I do if I'm a nonresident in the new state?
As a nonresident, you still have to use an apportionment
schedule to determine how much tax you owe in each state, but the interesting
twist here is that you also pay tax on all of your income for the entire year
to your resident state. Why do the apportionment schedule, then? Because you
pay taxes on what you earned in the temporary state in addition to what you pay
to your resident state.
Does this sound like double taxation? It is, except that most
states usually allow a credit on your resident return for the taxes you paid to
the other (nonresident) state. This usually means that you won't pay any more
tax than you would if you didn't have to complete the temporary state's return.
But if your nonresident state has higher taxes than your resident state, you
might end up paying more in total taxes because your resident state won't allow
you a full credit.
Also, if you have enough deductions to significantly reduce your
taxes for your resident state, but don't have any of those deductions for your
temporary state, you might have to pay higher taxes overall. If this is the
case, you won't have enough resident state taxes to use the full credit from
the nonresident state, and you can't carry over the excess nonresident taxes to
use as a credit in a later year.
When should I file more than one state income tax return?
You may have to file more than one state income tax return if
you have income from, or business interests in, other states. Here are some
examples:
- You are an S corporation
shareholder and the corporation does most of its business in a state other
than the state where you live.
- You're a partner in an
out-of-state partnership.
- You own rental property in
another state.
- You're the beneficiary of a
trust or estate that has interests in another state.
Fortunately, in most cases your resident state allows you to
take a credit for the taxes you have to pay to the other state, as in a
temporary residence situation. Check your state tax website for information on
whether your state offers this credit. TurboTax can also help you figure out
the credit.
