State Income Tax: Living in One State, Working in Another

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.

WATER SPORT (1)

 

1,553 Replies to “State Income Tax: Living in One State, Working in Another”

  1. OK. So here is my situation. I am working in Alaska, live in Colorado and my company is based in Louisianna. They are taking louisian state taxes out. What is the right situation? What state should my taxes be taken out for? I am guessig NOT Louisianna.

    1. Hi Mike,

      You will always be taxed in the the states in which you live and work, so you should be taxed in Alaska and Colorado (though lucky for you, Alaska has no personal income tax). You should not, however, be taxed in Louisiana if your company is based there but you don’t work there. But if you own the company, it’s an entirely different tax situation altogether and you could very well be taxed in Louisiana.

    1. Hi Richard,

      Lucky for you, Wyoming has no income tax. So you don’t need to worry about witholding any Wyoming state tax. Idaho, however, does have an income tax and Idaho residents are taxed on all income, including that earned out of the state. So you do need to make sure that your Idaho state income tax is being witheld from your paycheck. And of course, don’t forget about federal taxes too!

      1. I was told that you can make up to $10,000,for instance, in Minnesota, and not have to pay tax on it, if you live in texas, for instance. Is there a limit such as this? Jo

      2. Hi Jo Ann,

        The amount withheld and taxed is not solely based on the earned income amount; there are many more factors that go into it such as the employee’s filing status, number of allowances/exemptions, earnings, and the IRS withholding tax tables (to name a few).

    1. I am in the same situation. But where should I file the nonresident tax return? The accountant from Wa state said they dont know much about Georgia, and they dont want to do it….

      1. Hi Thach,

        Since WA is income tax-free, it is possible that your accountant is not too familiar with filing many state tax returns. If you live in WA and work(ed) in GA, you’ll need to file a non-resident tax return to the state of Georgia. You can prepare this one online with RapidTax.com and we will e-file it directly to the state of GA. We offer free tax support via phone, email and livechat so you won’t be left confused.

      2. I am filling my tax return form .. For last year …

        1. It is asking me like whether I worked in city other then louisville
        2. We gave the taxes for newyork as per my paystubs for last year till
        July 2016

        3. So I need to select newyork as my work location , right ? But what
        about my residential address

        4. As my address is in louisville only

        5. What is the rule here in tax system , if a person is working
        remotely

        In that case should he pay taxes according to residential area or client location ??

      3. If you lived in Louisville for the entire year, but earned income from New York and your pay stubs reflect this, you will need to file a full year resident form with KY and a non-resident state form with NY to have a non-refundable residential credit allocated to your KY state tax forms for taxes paid to NY.

  2. Do you have a spam problem on this blog; I also am a blogger, and I was curious about your situation; many of us have developed some nice practices and we are looking to swap techniques with other folks, be sure to shoot me an e-mail if interested.

    1. Hi Zilvinas,
      We use the Akismet plugin for spam filtering, which takes care of the vast majority of spam comments we receive. The ones left over are very easy to manually sort out.

    2. i live in Virginia, my employer is in Illinois and tax is deducted at Illinois so do i need to file state tax return at VIRGINIA and Illinois?

      1. Yes, that is correct. In addition to your federal return, you will need to file two state returns, a resident return to Virginia and a non-resident return to Illinois.

        Rather than filling out multiple forms, you can enter your tax information on the RapidTax application and we’ll do the calculations and work for you! To get started, create a RapidTax account and enter your basic personal information. If you have any questions along the way, the RapidTax team is available by phone, chat, or email support.

      2. What if you live in Florida, and work from a home office in Florida, but your company office is located in Chicago, IL? Do I still have to file a non-resident return to Illinois if I’m working solely out of a home office in Florida?

        Thanks!

      3. Hi Dee,

        Since this can get a bit confusing and there were a lot of people in your situation, we wrote a follow-up article about working remotely from home in one state while your company is headquartered in another. This article expands on your situation a bit more with specific examples.

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