Do I Have to Pay State Income Tax If I Live in Another State?

Navigating state income tax obligations is complex when living and working across state lines. Many individuals reside in one state while earning income in another, whether commuting or working remotely. This introduces tax considerations different from single-state filing. Understanding these complexities is important because each state has distinct tax laws, residency rules, and income sourcing regulations. A clear grasp ensures compliance and prevents double taxation.

Determining Your Tax Residency

Understanding tax residency is foundational for multi-state income tax. States distinguish between “domicile” and “statutory residency.” Domicile refers to your permanent legal home, where you intend to return. States consider factors like voter registration, driver’s license, primary residence, and family location.

Statutory residency is determined by time physically spent in a state, regardless of intent to make it permanent. Many states apply a “183-day rule”: spending over half the year (183 days or more) in a state may make you a statutory resident. This can lead to situations where an individual is domiciled in one state but a statutory resident of another. Both states might claim the right to tax your income.

Each state has specific residency criteria. A resident is generally subject to tax on all income, regardless of where it was earned. For example, a resident state can tax income earned from a job or property in a different state. Accurately determining tax residency is the first step in understanding your state income tax liability.

Understanding Where Income Is Taxed

Beyond residency, understanding income “sourcing” is crucial for multi-state taxation. Income is generally taxed by the state where it is earned, regardless of taxpayer residence. This applies to wages, business profits, and rental income.

Wages are typically sourced to the state where work is physically performed. If you are a non-resident earning income sourced to a state, that state usually requires a non-resident tax return to report and pay tax on that income. For example, if you commute to an office in another state, the work state will generally tax the income earned there, even if you are not a resident.

Other income types have specific sourcing rules. Rental income is sourced to the state where the property is located. Business income is sourced where the activities generating it occur. Even if you do not physically live or work in a state, income-generating assets or business interests there can create a tax filing obligation.

Navigating Multi-State Taxation

When an individual is subject to income tax in more than one state, mechanisms prevent or alleviate double taxation. One mechanism is “reciprocal agreements” between states. These allow residents of one state to work in a neighboring state without filing a non-resident tax return in the work state. Instead, individuals covered by a reciprocal agreement only pay income taxes to their state of residence. For example, if you live in a state with a reciprocal agreement with your work state, your employer would typically only withhold taxes for your home state.

Without a reciprocal agreement, the common method to avoid double taxation is a “credit for taxes paid to other states,” offered by most states, particularly your resident state. This credit reduces your resident state tax liability by the income tax paid to the non-resident (source) state on the same income. The credit is generally limited to the amount your resident state would have imposed on that income, meaning you will not receive a credit that exceeds your resident state’s tax rate. This system ensures that while you might file returns in multiple states, you generally do not pay more overall tax than if all income were taxed by a single state at the higher of the two rates.

Special Situations and Considerations

Several specific situations can complicate multi-state tax obligations. Remote work and telecommuting introduce unique tax implications. Some states, like New York or Pennsylvania, have “convenience of the employer” rules, sourcing income to the employer’s state even if work is performed remotely in another state. This means a remote worker might owe taxes to the employer’s state, in addition to their resident state.

Individuals who move across state lines during a tax year become “part-year residents” in both states. This typically requires filing part-year resident returns in both states, with each state taxing income earned while a resident there. For example, if you moved in June, your former state would tax income earned from January to May, and your new state would tax income from June to December.

States with no state income tax also impact multi-state scenarios. Nine states do not impose a statewide income tax, simplifying one side of the tax equation if you live or work in one. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Finally, even if income is sourced to a state, non-residents may only be required to file a return if their income exceeds a minimum threshold set by that state. These thresholds can vary and might be low.