Minnesota Resident Working in Another State: Tax Rules to Know

Living in Minnesota but earning income in another state can complicate tax filing. Each state has its own rules on residency, income taxation, and credits for taxes paid elsewhere. Understanding these differences is crucial to avoid overpayment or unexpected tax bills.

Tax obligations depend on where you live, work, and how states handle out-of-state income. Knowing the key rules ensures accurate filings and prevents penalties.

Residency Classification

Minnesota taxes individuals based on residency status, classifying them as full-year residents, part-year residents, or nonresidents. Each category has different tax implications, making it essential to understand how income is taxed.

Domicile

Domicile refers to a person’s permanent home—the place they intend to return to after temporary absences. Minnesota considers factors such as primary residence, voter registration, vehicle registration, and mailing address when determining domicile.

Even if someone works in another state for most of the year, they may still be considered a Minnesota resident for tax purposes unless they can prove permanent relocation. If domiciled in Minnesota, all income—regardless of where it is earned—is subject to Minnesota state income tax. This can lead to taxation by both Minnesota and the work state, making it important to understand tax credits.

Statutory Residence

Even without meeting the domicile criteria, a person may still be a Minnesota resident under the statutory residency rule. This applies to individuals who maintain a place of abode in Minnesota and spend at least 183 days there in a tax year.

The 183-day count includes any day spent in Minnesota, even if only for part of the day. For example, if someone works in North Dakota but returns to Minnesota on weekends, those days contribute to the threshold. Once classified as a statutory resident, all worldwide income is subject to Minnesota taxation. Keeping travel records can help individuals avoid unintended tax consequences.

Part-Year Residency

Individuals who move to or from Minnesota during the year may be classified as part-year residents. This status applies when someone establishes or relinquishes domicile in Minnesota at some point during the tax year.

Part-year residents are taxed only on income earned while domiciled in Minnesota. For instance, if someone moves out of Minnesota in June, only income earned from January to June is subject to Minnesota state tax. However, wages earned after relocating may still be partially taxed if they come from Minnesota-based employment or business activities.

When filing, part-year residents must allocate income between Minnesota and the other state based on residency periods. Documentation such as lease agreements, home purchase records, or change-of-address filings can help substantiate residency changes and ensure accurate tax reporting.

Filing Multiple State Returns

Earning income in another state often requires filing multiple state tax returns. Most states tax income earned within their borders, meaning wages, business income, or rental earnings sourced from another state may be subject to taxation there.

For example, a Minnesota resident working in Wisconsin will likely need to file a Wisconsin nonresident return in addition to their Minnesota resident return. Each state has different rules for determining taxable income, which can lead to variations in tax liability. Some states tax only wages earned within their jurisdiction, while others also tax business profits or investment income linked to that state.

Tax rates vary significantly. Minnesota’s top individual income tax rate in 2024 is 9.85%, while South Dakota and Texas impose no state income tax. Understanding these differences helps estimate tax liability and ensures the correct amount is withheld from paychecks.

Filing in multiple states also means dealing with different tax deadlines and forms. While most states follow the federal April 15 deadline, some have extensions or specific filing requirements. Missing a state filing requirement can result in penalties, even if no additional tax is owed.

Credits for Taxes Paid to Other States

Minnesota residents earning income in another state often face taxation in both places. To prevent double taxation, Minnesota offers a credit for taxes paid to other states, applicable only to income taxed by both jurisdictions.

The credit is claimed on Minnesota Form M1CR and is generally limited to the lesser of the tax paid to the other state or the Minnesota tax liability on that same income. For example, if a Minnesota resident earns $50,000 in Iowa and pays $2,500 in Iowa state tax, but Minnesota would have taxed that income at $3,000, the credit is capped at $2,500. If the other state’s tax is lower than Minnesota’s, the resident must still pay the difference.

Minnesota does not allow a credit for local taxes or taxes paid to foreign countries. Proper documentation, such as a copy of the other state’s tax return and proof of payment, is required to claim the credit. If a taxpayer later receives a refund from the other state due to an amended return or audit adjustment, they must adjust their Minnesota return accordingly.

Filing Status When Spouse Lives Elsewhere

Married taxpayers face additional challenges when their spouse lives in a different state. Minnesota follows federal guidelines for filing status, meaning couples must typically use the same status on their state return as they do on their federal return.

If one spouse earns income in Minnesota while the other works and resides in another state, the couple must allocate income properly to ensure accurate taxation. Some states, like Wisconsin and North Dakota, have reciprocity agreements with Minnesota that simplify tax filing for residents working across state lines, but these do not apply if a spouse permanently resides in another state.

In cases where one spouse is considered a nonresident of Minnesota, filing separately may reduce overall tax liability, especially if the nonresident spouse lives in a state with lower or no income tax, such as South Dakota. However, filing separately at the federal level can eliminate eligibility for certain deductions and credits, such as the Earned Income Tax Credit or education-related tax benefits.

Withholding Adjustments

Managing tax withholding is important for Minnesota residents earning income in another state. Employers typically withhold state income tax based on the work location, which may not always align with an employee’s actual tax liability.

Minnesota residents working in a state without a reciprocity agreement may need to request reduced withholding in the work state to avoid excessive tax payments. This can often be done by filing a withholding exemption form with the employer. At the same time, employees may need to increase Minnesota withholding or make estimated tax payments to cover any shortfall.

If withholding is not properly adjusted, individuals may face underpayment penalties. Minnesota requires taxpayers to pay at least 90% of their total tax liability throughout the year to avoid penalties.

For those with multiple sources of income, including self-employment or investment earnings, estimated tax payments may be necessary. Minnesota follows the federal estimated tax schedule, requiring quarterly payments if total state tax liability exceeds $500. Proper planning and withholding adjustments help avoid unexpected tax bills while ensuring compliance with Minnesota’s tax laws.