How to File Tax Returns in Two States

Navigating tax obligations can become complex when an individual’s financial activities span across state lines. Many people encounter situations requiring them to file tax returns in more than one state, a common occurrence due to various life changes and work arrangements. Understanding the specific requirements and processes for multi-state tax filing is important for ensuring compliance and accurately reporting income. This article provides guidance on determining when multiple state filings are necessary, what information to gather, how to utilize tax credits designed to prevent double taxation, and the procedural steps for submitting these returns.

When Multiple State Filings are Necessary

Individuals often face the need to file tax returns in more than one state due to their residency status or the geographic source of their income. A state’s ability to tax an individual’s income is primarily determined by whether they are considered a resident, non-resident, or part-year resident within that state. Understanding these classifications is the first step in identifying filing obligations.

A resident is generally someone who lives in a state for the entire tax year and considers it their permanent home, or “domicile.” Residents are typically subject to tax on all their income, regardless of where it was earned. This means income from investments, a business, or employment in another state is usually taxable by the resident state.

A non-resident is an individual who does not live in a state but earns income from sources within that state’s borders. Examples include earning wages from a job physically performed in a state where one does not reside, or owning rental property located in a different state. Non-residents are generally taxed only on the income sourced within that particular state.

A part-year resident is someone who moves into or out of a state during the tax year. For the portion of the year they were a resident, their worldwide income is typically taxable by that state. For the portion of the year they were a non-resident of that state, only income sourced within that state is usually taxable.

Income sourcing rules dictate where different types of income are considered to be earned for tax purposes. Wages and salaries are generally sourced to the state where the work or services are physically performed. For instance, if an individual lives in one state but commutes to another for work, the work state will typically tax that income. Similarly, income from rental properties is usually sourced to the state where the property is physically located.

Remote work arrangements have introduced additional complexities in income sourcing. While many states generally tax income where the employee physically performs the work, some states apply what is known as a “convenience of the employer” rule. Under this rule, if an employee works remotely for an employer based in a state with such a rule, they may still be considered to have earned that income in the employer’s state, even if they never physically step foot there. This can create a filing obligation in the employer’s state, in addition to the employee’s resident state.

Gathering Information for Multi-State Returns

Accurately preparing multi-state tax returns requires diligent collection of specific financial documents and personal records. The process begins with identifying all sources of income and where that income was earned. This ensures that every state with a legitimate claim to tax a portion of one’s income is addressed.

A primary document for wage earners is the Form W-2, which details income and withholding. If an individual worked in multiple states, their W-2 may show separate state income and withholding amounts for each state. For contract work, investment income, or other non-employee compensation, Forms 1099 (e.g., 1099-NEC, 1099-INT, 1099-DIV) or K-1 forms from partnerships might be received. These forms should clearly indicate the state where the income was earned or where taxes were withheld.

For individuals who moved during the tax year, precise records of residency dates are essential. This includes the exact date an individual moved into or out of a state. This information is important for accurately determining the portion of income taxable by each state for part-year residents.

Beyond income statements, it is important to gather documentation for any state tax payments made throughout the year. This includes estimated tax payments or additional tax paid with prior year’s returns. Having comprehensive records for both income earned and taxes withheld or paid in each relevant state is fundamental for proper multi-state tax preparation. These records help to substantiate claims for credits and prevent discrepancies during the filing process.

Understanding Credits for Taxes Paid to Other States

When an individual has income taxed by more than one state, a mechanism exists to prevent that income from being taxed twice. This mechanism is typically referred to as a “credit for taxes paid to another state.” This credit is a fundamental component of multi-state tax filing and is designed to alleviate the burden of double taxation.

The core concept of this credit allows an individual to reduce their tax liability in their resident state for income taxes paid on the same income to a non-resident state. The resident state generally taxes all of an individual’s income, regardless of where it was earned. However, if a portion of that income was also legitimately taxed by another state where it was sourced (e.g., where an individual worked or owned property), the resident state provides this credit.

This credit is almost always claimed on the resident state’s tax return. The non-resident state usually has the primary right to tax income sourced within its borders. Therefore, an individual first calculates and pays tax to the non-resident state on the income earned there. Then, when filing their resident state return, they can claim a credit for the tax already paid to the non-resident state on that shared income.

The amount of the credit is generally limited to the lower of two figures: either the actual income tax paid to the other state on the specific income, or the amount of tax that would have been owed on that same income in the resident state. This limitation ensures that the credit does not reduce the resident state’s tax liability below what it would have been if the income had been earned entirely within that state. This credit typically applies only to individual income taxes and not to other state-imposed taxes like property or sales taxes. Some states may also have reciprocity agreements that simplify filing for specific income types, such as wages, by preventing withholding in the work state.

The Process of Filing Multi-State Returns

Filing tax returns in multiple states involves a specific sequence of actions to ensure accurate reporting and proper application of credits. Once all necessary financial information and residency details have been compiled, the actual preparation and submission of the returns can begin. This process builds upon the understanding of residency rules, income sourcing, and the credit for taxes paid to other states.

The first step in filing multi-state returns is generally to complete the non-resident state tax return(s). This is because the tax liability determined on the non-resident return, specifically the tax paid on income sourced to that state, is needed to calculate the credit on the resident state return. The non-resident return reports only the income earned within that state’s borders. Once the non-resident return is finalized and the tax liability is calculated, this figure becomes a critical input for the next step.

After completing any non-resident returns, the next action is to prepare the resident state tax return. This return will include all worldwide income earned during the tax year, regardless of its source. On the resident state return, the credit for taxes paid to other states is then claimed. Tax software typically has a specific section or form for entering the tax paid to the non-resident state, which then automatically calculates and applies the allowable credit. This credit reduces the resident state’s tax liability, preventing the same income from being taxed fully by both states.

While it is possible to manually prepare multi-state tax returns, the complexity of calculations, especially for prorating income and applying credits, makes using tax preparation software a practical choice for many individuals. Tax software is designed to guide users through the process, perform the necessary calculations, and help ensure that credits are correctly applied. Once all returns are prepared, they can typically be submitted electronically (e-filed), which is often the fastest and most secure method. Alternatively, paper returns can be printed and mailed to the respective state tax authorities, though this method may involve longer processing times.