Yes, you do
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.
