How to File Taxes for Two States Explained

When tax obligations cross state lines, they become more intricate than a single state filing. This often occurs when an individual lives in one state but works in another, or relocates partway through the year. The primary objective is to accurately report all income and ensure it is not taxed twice by different state jurisdictions. Understanding the specific rules and processes for each state involved is important for proper compliance.

Determining Your State Residency and Filing Status

State tax obligations depend on an individual’s residency status, which varies by state. A “resident” is taxed on all income, regardless of where it was earned; their home state will tax income from both in-state and out-of-state sources. A “non-resident” is generally taxed only on income earned within that state’s borders. A “part-year resident” applies to individuals who move during the tax year; they are taxed as a resident for the portion of the year they resided in the state and as a non-resident for income sourced there during the remainder.

States use factors to determine residency. “Domicile” refers to an individual’s true, fixed, and permanent home. An individual can only have one domicile. Establishing a new domicile requires demonstrating intent to reside there indefinitely, evidenced by actions like registering to vote, obtaining a driver’s license, registering vehicles, and updating mailing addresses.

Many states also use a “statutory residency” test, often involving a physical presence rule. A common threshold is spending more than 183 days in a state during the tax year, which can classify an individual as a resident even if their domicile is elsewhere. It is possible to be considered a resident of multiple states simultaneously under these varying definitions. For example, a college student might maintain domicile in their home state but qualify as a statutory resident in the state where they attend school for a significant portion of the year. Remote workers living in one state but working for an employer in another might also have dual residency considerations.

Identifying Income Sourced to Each State

After establishing residency, the next step involves determining which income is taxable by which state, a process known as “income sourcing.” This concept dictates where income is considered to have been earned or generated. Proper sourcing ensures that each state only taxes the income it is legally entitled to.

Wages and salaries are generally sourced to the state where the work was physically performed. For example, if an individual lives in one state but commutes to another for work, their wages are sourced to the job site’s state. Form W-2, Boxes 15 through 17, provides information on state wages and tax withheld, aiding proper income allocation.

Business income is usually sourced where activities occur, potentially involving apportionment formulas considering property, payroll, and sales attributable to each state. Many states use “market-based sourcing” for services, meaning income is sourced where the customer receives the benefit. Rental income is sourced to the state where the physical property is located. If a taxpayer owns rental property in a different state, income or loss from it is taxable by that state.

Capital gains, such as those from the sale of investments, are commonly sourced to the taxpayer’s state of residence. Exceptions exist for gains from real property sales, which are sourced to the property’s location. Other income types, such as pensions, interest, and dividends, are generally sourced to the taxpayer’s state of residence, meaning they are taxed by the state where the individual lives, regardless of the financial institution’s location.

Understanding Tax Credits for Out-of-State Income

To prevent income from being taxed by multiple states, many jurisdictions offer a “credit for taxes paid to another state.” This mechanism alleviates double taxation when the same income is subject to tax in both a resident and non-resident state. The resident state typically grants this credit for taxes paid to a non-resident state on income taxed by both.

The general principle is that the resident state, which taxes worldwide income, will allow a credit for the income tax paid to the non-resident state on the income earned there. For instance, if a person lives in State A but works in State B, State B taxes the income earned within its borders. State A, as the resident state, will then typically provide a credit for the tax paid to State B on that income. This ensures the combined state tax on that income does not exceed what would have been paid if all income were earned and taxed solely in the resident state.

The credit amount is usually limited. It generally cannot exceed the tax the resident state would have imposed on that same income. If the non-resident state’s tax rate is higher, the credit may not fully offset the tax paid. The credit applies specifically to individual income taxes and typically does not cover other types of taxes, such such as property taxes or business license fees. The actual amount of tax paid to the other state, not just the amount withheld, is used to calculate the credit.

Preparing Your Multi-State Tax Returns

Preparing multi-state tax returns requires careful organization and a clear understanding of income allocation. The first practical step involves gathering all necessary financial documents. This includes W-2 forms, which detail state wages and withholding, as well as various 1099 forms for other income types like interest, dividends, or independent contractor earnings. K-1 forms are also essential for individuals with income from partnerships or S corporations.

A general rule for multiple state filings is to prepare non-resident state returns first. The tax liability from the non-resident return is often needed to determine the credit for taxes paid to another state on the resident state return. Each state has specific tax forms for non-residents and part-year residents. Information from W-2 Box 15 (state employer ID number), Box 16 (state wages), and Box 17 (state income tax withheld) is entered into these forms to attribute income correctly.

Tax preparation software can help navigate multi-state filing complexities. For unique income streams, complex residency, or significant tax implications, seeking assistance from a qualified tax professional is advisable. They can provide tailored guidance and ensure compliance with state tax laws.

Submitting Your State Tax Returns

After meticulously preparing all necessary forms, the final stage involves submitting your state tax returns. The most common methods for submission include e-filing through tax software or directly via state tax portals. E-filing generally offers a faster processing time and provides immediate confirmation of receipt. While most taxpayers can e-file multiple state returns, some platforms or states may have limitations on the number of states that can be e-filed, usually capping at five state returns. Alternatively, taxpayers can mail paper returns, though this method typically has a longer processing period.

If a tax payment is due, various options are available depending on the state. Common payment methods include direct debit from a bank account, credit card payments (which may incur a processing fee), or mailing a check or money order with a payment voucher. For individuals with fluctuating income, estimated tax payments may be required throughout the year to avoid underpayment penalties. These payments are typically made quarterly.

Upon successful submission, whether through e-filing or mail, it is important to retain confirmation of filing. E-filers will receive a confirmation number, which should be saved for record-keeping. For mailed returns, sending them via certified mail with a return receipt can provide proof of mailing and delivery. Taxpayers should also be aware of state-specific filing deadlines, which generally align with the federal tax deadline, typically April 15th, though extensions can be requested if more time is needed to prepare the return.