Filing taxes when you live and work in different states can be a bit more complicated than filing taxes in a single state. This is because each state has its own tax laws, tax rates, and tax brackets. Filing requirements may also vary and there’s the potential for double taxation. The additional paperwork can also be a headache. There are, however, some general steps to follow when filing your taxes.
1. Determine Your Residency Status
Determining your residency status when you live in one place but work in another can be complicated and depends on the specific rules of each state. Generally, most states consider the following factors when determining your residency status:
- Domicile: Your domicile is your permanent legal residence, and it is generally determined by the state where you have the strongest connections, such as where you own a home, where your family lives, or where you vote.
- Physical Presence: If you spend a significant amount of time in a state, you may be considered a resident for tax purposes, even if you do not have a domicile in that state.
- Intention: Your intention to establish residency in a state can also be a factor. For example, if you move to a new state with the intention of staying permanently, you may be considered a resident of that state for tax purposes.
- Source of Income: If you earn income in a state, you may be considered a resident for tax purposes, even if you do not live in that state.
- Connections to Other States: If you have connections to multiple states, such as owning property or having family members in different states, the state where you have the strongest connections may be considered your residency for tax purposes.
To determine your residency status in a state, you should review the specific rules and regulations of that state. It’s important to note that residency rules can vary between states, and you may be required to file tax returns in multiple states if you have income from different sources.
2. Identify Your Income Sources
When paying state income taxes as a full-time resident, you generally need to report and pay taxes on all income that you earned during the tax year. As a part-time resident or non-resident, however, you are typically only required to pay taxes on income earned within the state’s borders. The specific rules for what income sources are considered for tax purposes, however, may vary depending on the state in question.
Here are some common types of income that may be considered when paying state income taxes as a non-resident or part-time resident:
- Wages and salaries earned within the state
- Income from self-employment or business activities conducted within the state
- Rental income from property located within the state
- Income from investments, such as interest, dividends, and capital gains, earned within the state
- Income earned from performing services within the state, such as consulting, speaking engagements, or other professional services
It’s important to note that different states may have different rules for what income sources are taxable. For example, some states may exclude certain types of income, such as retirement income or military pay, from taxation. If you’re unsure which income sources are taxable in a particular state, consult with a tax professional or check with the state’s tax authority.
3. Check For Reciprocity Agreements
Reciprocity agreements allow residents of one state to work in another without paying income tax in that state. Currently, there are 17 states with this type of tax agreement. For example, a resident of Arizona may work in California without having to pay state taxes in California because the two states have a tax reciprocity agreement.
Since these agreements may change over time, it’s a good idea to check with each state’s tax authority to confirm the current status of any reciprocity agreements. Additionally, even if your state has a reciprocity agreement with another state, you may still need to file a tax return in both states if you have income from sources outside of your employer, such as rental income or investments.
4. File The Correct State Tax Returns & Forms
When filing taxes in two different states, you’ll need to provide certain forms to each state’s tax authority. Here are some of the most common forms you may need:
- W-2: Your employer is required to provide you with a W-2 form that shows your total wages, tips, and other compensation for the year. You will need to use this form to report your income to both states.
- 1099: If you are self-employed or received income from other sources, you may receive a 1099 form. This form shows the total amount of income you received from a payer and the type of income.
- Non-Resident State Tax Return: If you are a non-resident in one of the states, you will need to file a non-resident state tax return. This form will help you report your income earned in that state and calculate the amount of tax owed.
- Resident State Tax Return: If you are a resident in one of the states, you will need to file a resident state tax return. This form will help you report all your income, including income earned in the other state, and calculate the amount of tax owed.
- Schedule(s) Showing Income Allocation: Depending on the state’s rules, you may need to fill out a schedule or form that shows how your income is allocated between the two states.
Remember that tax rules can vary between states, so it is important to consult with a tax professional or review the specific tax requirements for each state in which you earned income to ensure that you file your taxes accurately and on time.
Don’t Forget to Claim Credits and Deductions!
The deductions and tax credits you can claim when working and living in different states will depend on a variety of factors, including the states involved and your individual circumstances. The following is a list of some of the most common deductions and credits that may apply:
- State Income Tax Paid: You may be able to deduct the state income tax you paid to one state from your taxable income in the other state. This can help you avoid double taxation on the same income.
- State & Local Sales Tax: If you live in a state with no income tax or you made large purchases, you may be able to claim a deduction for state and local sales tax paid instead of income tax paid.
- Moving Expenses: If you moved to a new state for a job, you may be able to deduct certain moving expenses on your federal income tax return.
- Retirement Plan Contributions: If you contribute to a retirement plan, such as a 401(k) or IRA, you may be able to deduct those contributions from your taxable income in both states.
- Child and Dependent Care Credit: If you pay for child or dependent care expenses while working, you may be eligible for a tax credit in both states.
- Earned Income Tax Credit (EITC): If you have a low or moderate income, you may be eligible for the EITC, which can reduce your federal income tax liability and may also be available in some states.
Since each state has its own rules and regulations, be sure to review the specific tax requirements for each state in which you earned income to ensure that you are taking advantage of all available deductions and credits.
5. Consider Seeking Professional Help
If you work and live in different states, it may be a good idea to hire a tax professional to help you with your taxes. Filing taxes in multiple states can be complicated, and a tax professional can help you navigate the rules and regulations for each state to ensure that you file your taxes accurately and on time.
A tax professional can also provide the following benefits:
- Expertise: A tax professional has expertise in tax law and can help you understand the tax rules for each state where you earned income.
- Accuracy: A tax professional can help you avoid errors and ensure that your tax returns are filed accurately.
- Peace of Mind: Knowing that your taxes are being handled by a tax professional can give you peace of mind and reduce your stress.
Although hiring a tax professional comes with a cost, it may be worth it if you can save time, avoid errors, and ensure that you are taking advantage of all available tax deductions and credits.
Ultimately, the decision to hire a tax professional will depend on your circumstances, such as your level of comfort with tax laws, your time constraints, and your budget. If you need help with your taxes, call Tax Defense Network at 855-476-6920 for a free, no-obligation consultation today!