Remote work, commuting across state lines, and temporary work assignments have made multi-state tax returns much more common. If you lived in one state but earned income in another, you may be wondering whether you have to file one tax return or two and whether you'll end up paying taxes twice.
The good news? In most cases, you won't pay tax on the same income twice, but you may have additional filing requirements.
Which State Gets to Tax Your Income?
Generally, the state where you earned the income has the right to tax that income. This is often called the "source" state.
The state where you live also typically taxes all of your income, regardless of where it was earned. This is your "resident" state.
For example, if you live in Nevada but work in California, California will tax the wages earned there. Nevada has no state income tax, so there's no resident return to file.
If you live in Arizona and work in California, you may need to file:
- A California nonresident return for the California income.
- An Arizona resident return reporting all your income.
Arizona generally provides a credit for taxes paid to California, helping to prevent double taxation.
Will I Be Taxed Twice?
Usually, no.
Many states offer a credit for taxes paid to another state. This means your resident state recognizes that you've already paid tax elsewhere and adjusts your tax liability accordingly. However, every state's rules are different, and the amount of the credit can vary.
What About Remote Work?
Remote work has added another layer of complexity. If you work from home for a company located in another state, the taxation depends on several factors:
- Where you physically performed the work.
- The employer's location.
- State-specific remote work rules.
- Whether the states involved have reciprocal agreements.
For example, simply working for a New York company doesn't automatically mean New York taxes all of your wages if you're working from another state. Some states have special "convenience of the employer" rules that can affect this determination.
Reciprocal Agreements
Some neighboring states have agreements allowing residents to pay income tax only to the state where they live, even if they work across the border.
Common examples include certain arrangements between:
- Maryland and Virginia.
- Indiana and Kentucky.
- Pennsylvania and New Jersey.
If a reciprocal agreement exists, you may only need to file a resident return, provided you've completed the appropriate withholding forms with your employer.
California does not have reciprocal agreements with other states.
What If My Employer Withheld Tax for the Wrong State?
Mistakes happen. If your employer withheld taxes for the wrong state, you may need to:
- File a nonresident return to recover over-withheld taxes.
- File a resident return in your home state.
- Ask your employer to correct future withholding.
Ignoring incorrect withholding can lead to an unexpected tax bill or delayed refunds.
Temporary Assignments and Travel
If you temporarily worked in another state for part of the year, that income could still create a filing requirement.
Common situations include:
- Traveling nurses.
- Construction workers.
- Entertainment industry professionals.
- Consultants.
- Sales representatives.
- Athletes and performers.
Even a short-term assignment can trigger state tax obligations depending on the state's filing thresholds.
Military Families and Special Rules
Military members and their spouses may qualify for special residency protections under federal law. Students, professional athletes, and certain transportation workers may also have unique state tax rules.
Keep Good Records
If you work in multiple states, keep track of:
- The dates you worked in each state.
- Your work locations.
- W-2s and 1099s.
- State tax withholding.
- Travel records if required.
Good documentation can make preparing your return much easier and help support your position if questions arise.
Working in one state while living in another doesn't necessarily mean you'll pay more tax, but it often means you'll have more paperwork. Understanding residency rules, nonresident returns, tax credits, and reciprocal agreements can help you avoid surprises and ensure you're paying only what's required.
If you've moved during the year, worked remotely, or earned income in multiple states, it's worth reviewing your specific situation with a tax professional. Multi-state tax rules can be complicated, and a little planning can save both time and money.
Disclaimer: This information is provided for general informational purposes only and should not be considered tax, legal, or financial advice. State tax laws vary and change frequently, and every taxpayer's situation is unique. You should consult with a qualified tax professional regarding your specific circumstances before making tax-related decisions.