If I Work in One State and Live in Another Where Do I File Taxes?

Living in one state and working in another is common for many individuals. This arrangement introduces specific complexities regarding state income tax obligations. Understanding where and how to file taxes is important for ensuring compliance and avoiding potential double taxation. State tax laws can be nuanced, requiring careful attention.

Understanding Residency and Source Income

Determining your tax obligations begins with understanding tax residency and income sourcing. Tax residency is defined by two primary factors: your domicile and statutory residency rules. Your domicile is your permanent home, where you intend to return after temporary absences, and you can only have one. Statutory residency is met if you maintain a permanent abode in a state and spend 183 days or more there, regardless of domicile. Many states consider any part of a day spent within their borders as a full day.

States use a “facts and circumstances” test to determine residency, looking at various connections. These factors include voter registration, driver’s license and vehicle registration, primary residence, mail delivery, bank accounts, and professional licenses. The overall weight of these connections helps establish your closest ties, distinguishing a temporary presence from true residency.

Income sourcing, distinct from residency, dictates where your earnings are taxable. Generally, income is sourced to the physical location where work is performed. If you physically work in a state but do not reside there, that state typically taxes the income earned within its borders. For individuals working in multiple states, wages may be allocated based on days worked or services performed in each state.

Filing Requirements for Non-Residents and Residents

When you live in one state and work in another, you typically face dual filing obligations. You will file a resident tax return in your home state, reporting all your income, regardless of where it was earned. Simultaneously, you will file a non-resident tax return in the state where you physically perform your work, reporting only income sourced to that state. This dual filing ensures each state taxes the income it is entitled to.

To prevent the same income from being taxed twice, states offer a “credit for taxes paid to another state.” This credit alleviates double taxation. Your resident state usually allows you to claim a credit for income taxes paid to the non-resident work state on the same income. The credit amount is typically limited to the lesser of the tax actually paid to the non-resident state or the tax your resident state would have imposed on that specific income.

To utilize this credit, complete your non-resident state tax return first. The tax liability from this return provides information for claiming the credit on your resident state return. The credit reduces your tax liability in your resident state by the amount of tax already paid to the work state on the same income. This ensures the total tax paid on your income is generally not higher than if all your income was earned and taxed in your resident state.

Special State Agreements and Considerations

Certain agreements and unique circumstances can alter state tax filing requirements for individuals working across state lines. Reciprocal agreements are formal arrangements between states that simplify tax obligations for commuting wage earners. Under such an agreement, individuals only pay state income tax to their home state, and their employer in the work state withholds taxes solely for the resident state. This eliminates the need to file a non-resident return in the work state for wage income, though you may still need to submit a form to your employer to claim the exemption.

Another consideration involves states that do not impose a state income tax. If you live in a state without income tax and work in a state that does, you would only file a non-resident return in the work state. Conversely, if you live in a state with income tax but work in a state without it, you would only owe tax to your resident state, as the work state does not levy income tax. Your resident state would still tax all your income, regardless of where it was earned.

Remote work arrangements also introduce specific tax considerations. While income is generally sourced to where work is performed, some states have a “convenience of the employer” rule. Under this rule, if an employee works remotely from their home state for an employer in another state, the income might still be sourced to the employer’s state if the remote work is for the employee’s convenience rather than the employer’s necessity. This can result in complex tax situations.