It is very possible that you live in one state and work in another. If so, you may face some confusion while filing your tax return. State laws may require you to file a tax return in multiple states, increasing your chance of error during the tax return process. Other situations may also require you to file a tax return in multiple states, including but not limited to moving during the tax year or having a short term job/internship in another state during the tax year. If you work in one state and live in another or face a similar situation, please continue reading below to learn about the tax reporting requirements of living in one state and working in another.
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What are the tax filing requirements when working in a different state?As you know, U.S. taxpayers must file both a Federal tax return and a state tax return (if required by your state of residence). For your Federal tax return, simply report all the income you earned during the year regardless of the location. Generally, your living and working situation will not affect your Federal tax return. However, state tax laws may require you to file multiple state tax returns, which generally includes a tax return for your place of residence and for your place of employment (or where you generate your income).
When to file taxes in multiple states?As stated above, living in one state and working in another state may require you to file your taxes in multiple states. However, states do have border-related tax agreements to address this multiple tax return situation. It is important to research state reciprocity agreements to determine if you must file in both states. Each state has its own tax laws relating to reciprocity. Simply search online for your states reciprocity agreements.
If your home state has a reciprocity agreement with the state in which you work, then you should be able to file a single home state tax return. Additionally, you may elect an exemption that notifies your employer not to withhold out-of-state taxes from your paychecks. The U.S. tax system aims for taxpayers to pay state taxes to one state; therefore, state law attempts to accommodate you in situations where you may face taxation from multiple states.
If your home state does not have a reciprocity agreement with the state in which you work, then you should file multiple state tax returns. In the case of a differing employment state, you should file a nonresident state tax return, which simply means you work in the state but do not live there. If you lived in the employment state during the year, you will need to file either a normal state tax return or a part-year state tax return. However, this particular post addresses the situation relating to a nonresident state tax return. If you file a resident state tax return and a nonresident state tax return, state law should allows you to claim a tax credit on your resident tax return relating to the amount of taxes paid on your nonresident tax return.
The reciprocity agreements and tax credits help to offset potential double taxation of your earnings.
Resident state tax returnThe U.S. tax system uses your state of residence for state income tax purposes. If your state of residence imposes an income tax, you should report all income earned on your state income tax return and pay the appropriate tax amount. You should report your total earnings regardless of where you earned the income.
For example, if you live in California but earn $30,000 from a rental home in Oregon, you include the $30,000 on your California (resident) state tax return while also reporting the $30,000 on your Oregon (nonresident) state tax return. The tax you pay to Oregon should give you tax credits to apply on your California state tax return.
If your state of residence does not impose an income tax, you will not need to file a resident state tax return. Therefore, you will not report your out-of-state income to your home state as you are not required to file a resident tax return.
Nonresident state tax returnGenerally, if your employment state or the state in which you earn income imposes an income tax, you should file a nonresident state tax return. You should file a nonresident state tax return regardless of if you reported the related out-of-state income on your home (resident) state tax return. As I discussed above, your home state should offer tax credits on taxes paid to other states. The U.S. tax system does not want to force double taxation, and so, you should do the proper research to determine the tax breaks provided to you by your home state for taxes paid to nonresident states.
As a nonresident filer, you should utilize the apportionment schedule to determine your tax liability in each state where you have earned income. The apportionment schedule should be provided to you on the nonresident income tax return. Remember that you must pay tax on your total income to your home state as well as pay taxes to any nonresident states where you earn income. The apportionment schedule should determine the proper amount of taxes owed to the nonresident state(s).
While the U.S. tax system tries to be fair, there are situations where you may pay a higher amount of taxes due to your out-of-state income. First, if the nonresident state tax rate is higher than the tax rate of your home state, you may pay a higher tax amount if your home state disallows the full credit for the out-of-state taxes. Second, if you have a large amount of tax deductions on your resident tax return, your out-of-state tax credits may exceed your taxes owed. Excess nonresident tax credits do not carry-forward to future years; therefore, you lose unused tax credits.