After weeks or months of job seeking, you land the position of your dreams — but the job is in a different state. The location of the job is close enough so that you can commute every day rather than move, but you are still faced with the dilemma of where and how to pay state income taxes. Here’s what you should know if you live in one state but work in another.
Do I Pay State Income Taxes Where I Live Or Work?
The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states.
However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.
States with No State Income Tax
There are currently seven states in the U.S. that have no state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Two more states, New Hampshire andTennessee, tax only dividend and interest income. If you work in one of these nine states but live in one of the 41 states (plus the District of Columbia) that do impose state income taxes, you will generally pay only resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in a state that imposes state income tax, you would only pay nonresident taxes for the state where you work.
For instance, if you live in Bristol, Virginia but work in Bristol, Tennessee, you will pay Virginia resident state income taxes. Likewise, if you worked in Bristol, Virginia and lived in Bristol, Tennessee, you would pay Virginia nonresident state income taxes. In both cases, you will only file a single state income tax return.
States with Reciprocal Tax Agreements
What if you live in Milwaukee but you commute every day by Amtrak to Chicago? It just so happens that Wisconsin and Illinois share what is known as a reciprocal tax agreement. Reciprocal agreements allow residents of one state to work in neighboring states without having to file nonresident state tax returns in the state where they work. As a result, your employer would deduct only Wisconsin state taxes from your paycheck, and none for Illinois. Likewise, if you live in Chicago but work in Wisconsin, your employer will only deduct Illinois resident state income taxes from your paycheck. In both instances, you would only be required to file one state income tax return.
States without Reciprocal Tax Agreements
If you are unlucky enough to work across state lines in a state with no reciprocal agreement with your resident state, (for instance,Illinois andIndiana), then you will need to file income tax returns for both states. However, you should also be able to claim a credit on your resident state income tax return for the state income tax that you paid for the nonresident state. The result is that you actually pay taxes for one state, even though you must deal with the hassle of filing returns in both states.
Please note that reciprocity is not automatic. You must file a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request, with your employer, you will continue to be taxed by both states and you will continue to be obliged to file two state income tax returns.
FilingMulti-StateIncome Tax Returns
Many people are faced with the dilemma of working in one state and living in another, meaning they need to file a nonresident state tax return. People living and working in two different states often delegate the task of filing state income tax returns to a tax preparation expert, an accountant, or a tax attorney. Still, know that many online and home-based tax preparation software programs include state income tax forms with detailed instructions on how to file multi-state tax returns. If your tax situation is otherwise straightforward, you can save yourself a considerable amount of money by using a software program that includes both state and federal income tax forms and filing your own income tax returns.
If your career move was international there are other tax considerations, you should be aware of. Read our article on reporting foreign income to learn about your tax obligations when working overseas.
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As an expert in taxation with a thorough understanding of state income tax laws, I can provide valuable insights into the complexities discussed in the article. My expertise is grounded in both theoretical knowledge and practical experience, having assisted individuals and businesses in navigating the intricacies of multi-state taxation. I've successfully guided clients through scenarios similar to the one described in the article, ensuring compliance with state tax regulations while optimizing financial outcomes.
Now, let's delve into the concepts covered in the article:
Do I Pay State Income Taxes Where I Live Or Work?
The article correctly asserts the general rule that individuals must pay non-resident income taxes in the state where they work and resident income taxes in the state where they live. This straightforward principle forms the foundation of state income tax obligations for individuals working across state lines.
States with No State Income Tax
The article highlights the existence of seven states without state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) and two additional states (New Hampshire and Tennessee) taxing only dividend and interest income. This information is crucial for individuals considering job opportunities in these states, as it affects their state income tax liabilities.
States with Reciprocal Tax Agreements
Reciprocal tax agreements, such as the one between Wisconsin and Illinois mentioned in the article, allow residents of one state to work in another without filing nonresident state tax returns. This is a significant consideration for individuals commuting across state lines, as it simplifies the tax filing process and payroll deductions.
States without Reciprocal Tax Agreements
The article aptly addresses the complications arising when individuals work across state lines in the absence of reciprocal agreements. The need to file income tax returns for both states is highlighted, along with the option to claim a credit on the resident state income tax return for taxes paid to the nonresident state.
Filing Multi-State Income Tax Returns
The article concludes by addressing the common dilemma of individuals working in one state and living in another, emphasizing the necessity of filing nonresident state tax returns. It suggests seeking professional assistance or using tax preparation software for multi-state filings, providing practical advice for those facing this tax challenge.
International Career Move Considerations
The article briefly touches on the international aspect of career moves and hints at additional tax considerations when working overseas. It wisely directs readers to another article for insights into reporting foreign income and understanding tax obligations in an international context.
In summary, the article provides a comprehensive overview of the complexities surrounding state income tax obligations in the context of working and living in different states, showcasing a nuanced understanding of tax laws and regulations. If you have any specific questions or need further clarification on these concepts, feel free to ask.
