How to File Taxes If You Live in One State and Work in Another

When your home state differs from your work state, understanding tax obligations is important for compliance and to avoid double taxation. This often involves filing multiple state returns and understanding how states claim taxing rights over your income. Knowledge of state tax laws can simplify this annual task.

Understanding Residency and Income Sourcing

An individual’s tax residency status determines which states can tax their income. States categorize taxpayers as residents, non-residents, or part-year residents. A resident pays taxes on all income, regardless of where it was earned. A non-resident generally pays taxes only on income sourced within that state. Part-year residents move into or out of a state during the tax year, and their tax obligations are split based on their residency period.

States determine residency using various factors, with domicile as a key consideration. Domicile refers to your true, fixed, and permanent home, where you intend to return when absent. Factors states consider include your primary home’s location, where you spend most of your time, and where your driver’s license, vehicle, and voter registration are located.

Income sourcing dictates which state has the right to tax specific income. Wages earned for services performed in a state are sourced to that state. For example, if you live in one state but commute daily to work in another, the work state typically has the first right to tax those wages.

Remote work also follows income sourcing rules. If you work remotely from your home state for an employer in another state, your wages are typically sourced to your home state, as services are performed there. However, some states have “convenience of the employer” rules, which may source income to the employer’s state if remote work is for the employee’s convenience. Business income sourcing can be more complex, often depending on the physical location of the business activity, property, or sales.

Navigating State Tax Obligations and Credits

Individuals living in one state and working in another often have tax obligations in both their resident state and their non-resident work state. The work state taxes income earned within its borders, while the resident state taxes all of a resident’s income, regardless of where it was earned. Managing these obligations helps avoid double taxation.

Some states have reciprocal tax agreements, which simplify filing. These agreements mean wages earned in a reciprocal state are taxed only by the employee’s state of residence, not the work state. For instance, if a reciprocal agreement exists, your employer withholds taxes only for your home state, and you do not file a non-resident return in the work state for wages. However, these agreements vary, are not universal, and typically apply only to wage income, not other income types like business profits or capital gains.

When no reciprocal agreement exists, a “credit for taxes paid to another state” prevents double taxation. Your resident state grants a credit for income taxes paid to the non-resident work state on the same income. The credit amount is usually limited to the tax your resident state would have imposed on that income. To claim this credit, file your non-resident state tax return first, reporting income earned and tax paid. Then, use that liability to calculate the credit on your resident state tax return. This sequential filing ensures your resident state accounts for taxes already remitted. Other income, such as interest, dividends, or capital gains, is generally taxed only by your resident state, unless directly tied to property or a business physically located in another state.

Completing and Submitting Your State Tax Returns

When living in one state and working in another, you will generally need to prepare and submit a non-resident state income tax return for the state where you earned income. You will also file a resident state income tax return for your home state.

The order of filing is important: complete your non-resident state tax return first. This return establishes the income earned and tax owed to the work state. Once that liability is determined, use this information to calculate the credit for taxes paid to another state on your resident state tax return. This ensures your resident state correctly applies the credit, preventing double taxation.

Adjusting your tax withholding can help manage your tax liability. If you live in one state and work in another without a reciprocal agreement, adjust your Form W-4 (or state equivalent) with your employer. This ensures appropriate amounts are withheld for both your work state and resident state, helping avoid a large tax bill or excessive refund. If a reciprocal agreement is in place, you may need to file an exemption form with your employer in the work state to prevent withholding.

Common methods for submitting state tax returns include e-filing through commercial tax software or state tax portals, or mailing paper returns. E-filing is often the quickest and most secure method. If mailing, ensure your return is postmarked by the due date to avoid penalties.

Maintain thorough records for tax compliance, especially when dealing with multiple states. Keep copies of all W-2 forms, pay stubs, and completed state tax forms, including schedules for credits or adjustments. These records are essential for verifying income, deductions, and credits in case of an audit or questions from tax authorities.