Do You Pay Income Tax in the State You Live or Work?

Where you pay state income tax depends on where you live, work, and the tax laws of each state. Some states tax residents on all income, while others only tax earnings from within their borders. This can lead to individuals owing taxes in multiple states, making it important to understand these rules.

State tax laws vary widely, with some offering credits or agreements to prevent double taxation. Knowing your obligations helps avoid unexpected liabilities and ensures proper filing.

Residency Classification

States determine tax liability based on residency status. Residency definitions affect whether an individual is taxed on all income or just earnings sourced from that state.

Domicile Residency

A domicile is a person’s permanent home—the place they intend to return to even if they temporarily live elsewhere. Most states consider someone a resident for tax purposes if they establish domicile there, regardless of time spent elsewhere. Factors include voter registration, driver’s license address, property ownership, and financial ties.

Many states tax domiciled residents on all income, even if earned elsewhere. For example, New York taxes anyone domiciled in the state unless they can prove they have abandoned their New York domicile and established a new one. Changing domicile requires more than moving; individuals must show intent to remain in the new location indefinitely by selling property, updating official documents, and severing financial ties with their previous state.

Part-Year Residency

Individuals who move during the year typically qualify as part-year residents in both their former and new states, paying tax only on income earned while living in each. Some states also tax income from sources within their borders, even if earned while residing elsewhere.

For example, if someone moves from California to Texas in June, they file a part-year return in California, reporting income earned while living there. Since Texas has no state income tax, no additional state return is required. States often require documentation of the move date, such as lease agreements or employment records, to determine tax liability.

Statutory Residency

Even if domiciled in another state, individuals may be classified as statutory residents if they spend significant time in a different state. Many states apply a “183-day rule,” meaning those physically present for more than half the year may be considered residents for tax purposes.

For example, Connecticut classifies individuals as statutory residents if they maintain a permanent place of abode in the state and spend at least 183 days there. This can result in taxation on worldwide income, similar to domiciled residents. Keeping detailed records of travel dates and housing arrangements is crucial for those frequently moving between states.

Nonresident Tax Obligations

Earning income in a state where you don’t reside often creates tax obligations. Most states tax earnings generated within their borders, regardless of where the individual permanently lives. This includes wages, business profits, rental income, and certain investment earnings.

States generally require nonresidents to file a return if they exceed a certain income threshold. In 2024, New York requires nonresidents to file if they earn more than $8,000 from in-state sources, while California sets the limit at $5,363 for single filers.

Taxation of nonresidents extends beyond wages. Independent contractors and remote workers face complexities since self-employment income is typically sourced to where services are performed. A consultant based in Florida working remotely for an Illinois company may not owe Illinois taxes, but if they travel to Illinois for client meetings, income earned on those days could be taxable there.

Athletes, entertainers, and traveling professionals often face complex nonresident tax issues. Many states enforce a “jock tax,” requiring visiting professionals to pay tax on earnings from performances, games, or events held within the state. For example, an NBA player earning $10 million annually who plays four games in California may owe California tax on 4/82 of their salary, proportional to the number of games in the season. Musicians on tour must also file multiple state returns based on performance locations.

Real estate investments can also trigger nonresident tax obligations. Rental income is taxed by the state where the property is located, not the owner’s home state. If a Georgia resident owns a rental property in North Carolina, they must file a North Carolina nonresident return to report that income. When selling property, capital gains are often taxed by the state where the real estate is situated. Some states, such as South Carolina and Maryland, require withholding on real estate sales by nonresidents to ensure tax compliance.

Reciprocity Agreements

Some states simplify tax obligations for workers living in one state but earning income in another through reciprocity agreements. These agreements allow residents to avoid filing a nonresident return in the work state, ensuring they only pay income tax where they live. Typically, these arrangements apply to wages and salaries, excluding self-employment income and rental earnings.

For example, a Wisconsin resident commuting to Minnesota for work benefits from the reciprocity agreement between the two states. Instead of Minnesota withholding income tax, they can submit an exemption form to their employer, ensuring only Wisconsin taxes are deducted.

These agreements are not universal. Many states, including California, New York, and Texas, do not participate. This means someone living in New Jersey but working in New York must pay New York state income tax and later seek a credit from New Jersey to offset the burden.

Filing Multiple State Returns

Managing tax filings across multiple states requires careful attention to sourcing rules and allocation methods. Each state determines how income should be divided, often requiring apportionment formulas or direct allocation based on where earnings were generated.

Employers typically withhold state taxes based on an employee’s work location, but this may not always match the actual tax liability. Remote workers performing duties in multiple states must determine the correct allocation. Some states allow income to be divided based on days worked in each location, while others require a percentage-based approach using total earnings. Errors in apportionment can lead to underpayment penalties or unexpected tax bills, making accurate record-keeping essential.

Tax Credits for Double Taxation

When taxpayers owe income tax to multiple states, many states offer credits to prevent double taxation. These credits allow residents to offset taxes paid to another state against their home state’s tax liability.

Most states calculate the credit based on the lesser of the tax paid to the other state or the tax that would have been owed under the home state’s rates. For example, if a Virginia resident earns income in North Carolina and pays $3,000 in North Carolina taxes but would have owed only $2,500 on that income under Virginia’s tax rates, Virginia typically grants a credit of $2,500. Some states, such as California, limit credits to taxes paid to states with a reciprocal credit agreement, meaning residents earning income in non-agreement states may not receive full relief.

Not all income qualifies for these credits. Some states exclude capital gains or business income. Additionally, local taxes can complicate matters, as some cities impose income taxes that are not covered by state-level credits.

Employer Withholding and Adjustments

Employers determine state tax obligations by withholding income taxes based on an employee’s work location. Incorrect withholding can lead to underpayment penalties or unexpected tax bills, making it necessary for employees to review their withholdings and make adjustments when needed.

For employees working in a different state than their residence, employers generally withhold taxes for the work state. If a reciprocity agreement exists, employees can submit an exemption form to have taxes withheld for their home state instead.

Employees working in multiple states throughout the year may need to adjust their withholdings manually. Some states allow taxpayers to allocate wages based on days worked in each location, requiring careful tracking of workdays and income apportionment.