Filing taxes can become complicated when you live in one state but work in another. Many people face this situation, especially those living near state borders or working remotely for companies based elsewhere. Understanding how to handle state taxes in this scenario helps avoid penalties and ensures you pay the right amount. This guide breaks down what you need to know to file your taxes correctly when your home and workplace are in different states.
Understanding Residency and Tax Obligations
Your tax responsibilities depend largely on your residency status and where you earn income. States generally classify taxpayers as residents, nonresidents, or part-year residents.
Resident state: The state where you live most of the year and consider your permanent home.
Nonresident state: The state where you work but do not live.
Part-year resident: If you moved during the tax year, you might be a resident of two states for part of the year.
Most states tax residents on all income, regardless of where it is earned. Nonresidents usually pay tax only on income earned within that state. This means you may have to file tax returns in both states.
Filing Taxes in Your Resident State
Your resident state expects you to report all income, including wages earned in another state. This means you must include your out-of-state earnings on your resident state tax return. Some states offer credits to avoid double taxation, but you still need to report the income.
For example, if you live in New Jersey but work in New York, you report your total income to New Jersey. New Jersey may give you a credit for taxes paid to New York to prevent being taxed twice on the same income.
Filing Taxes in Your Work State
The state where you work will tax the income you earned there. You typically file a nonresident tax return in this state. This return reports only the income earned within that state.
Continuing the example, you would file a nonresident return in New York to report the income earned working there. You pay New York state income tax on that amount.
How Tax Credits Work to Avoid Double Taxation
To prevent paying tax twice on the same income, your resident state usually offers a credit for taxes paid to other states. This credit reduces your resident state tax liability by the amount you paid to the work state.
Here’s how it works:
Calculate your total tax liability in your resident state on all income.
Calculate the tax you paid to the work state.
Subtract the tax paid to the work state from your resident state tax liability.
Pay the remaining amount to your resident state.
This process ensures you pay the higher of the two states’ taxes but not both in full.
Special Cases: States with Reciprocal Agreements
Some neighboring states have reciprocal agreements. These agreements allow residents to pay income tax only to their home state, even if they work across the border. This simplifies tax filing because you do not have to file a nonresident return in the work state.
Examples include:
Maryland and Virginia
Illinois and Wisconsin
Pennsylvania and New Jersey
If your states have such an agreement, you usually submit a form to your employer to avoid withholding taxes in the work state.
Tips for Filing When Living and Working in Different States
Keep detailed records of where you worked and for how long, especially if you worked remotely or moved during the year.
Check state tax websites for specific rules and forms related to nonresident and resident returns.
Use tax software or consult a tax professional if your situation is complex.
File on time in both states to avoid penalties.
Understand local taxes such as city or county taxes, which may also apply.
Example Scenario
Imagine you live in Pennsylvania but work in New Jersey. You earn $60,000 annually, all from your New Jersey job.
You file a nonresident New Jersey tax return reporting $60,000 income and pay New Jersey state income tax.
You file a Pennsylvania resident tax return reporting $60,000 income.
Pennsylvania offers a credit for taxes paid to New Jersey, so you subtract the New Jersey tax from your Pennsylvania tax liability.
You pay the difference to Pennsylvania if Pennsylvania’s tax is higher.
This process ensures you do not pay tax twice on the same income.
What to Do If You Work Remotely
Remote work adds complexity. Some states tax income based on where the work is performed, not where the employer is located. If you live in one state but work remotely for a company in another, you generally pay taxes to your resident state.
However, some states have specific rules or temporary agreements due to increased remote work. Check both states’ tax laws or consult a tax advisor to confirm your obligations.
Final Thoughts on Filing State Taxes Across Borders
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