Many of us have moved or will move between the states in the future. Even though there may countless reasons for that, one common outcome is the payment of taxes in more than just one state. Given than the U.S. tax system is thousands (!) of pages long, it is anything then straight forward to report taxes when crossing the state lines.
If you worked in two states in a given year, you will most likely have to file taxes in both of them. This can get a little complicated because some states require you to report the whole income, regardless of where it was earned. Additionally, if you earned any passive income, such as from rental properties, you would file taxes in the state where the property is located.
Some states have reciprocity agreements that would exclude you from being taxed in both states. First step is to file a nonresident tax return in the state where you work, and then file the return in the state where you live.
Here are some options to consider when dealing with multiple state returns.
It is not uncommon to cross the state line to go to work. Without the reciprocity agreement, you would pay taxes in two states: the one where you live and the one where you work. The reciprocity allows you to request your employer to stop withholding taxes; you would only pay taxes in the state where you live. When you file an exemption form with your employer, you may need to indicate to have your resident state taxes withheld. Otherwise, you are more than likely to have a substantial tax liability when filing your returns.
There are sixteen states and the District of Columbia that have reciprocity agreements. For the states without the agreement, you will have to file a non-resident return and wait to get the money that was withheld from your paycheck.
Resident vs. Non-resident
To build on the previous point, what determines the residency for tax purposes? Residency is based on where your home is located. More specifically, where do you head back after a business trip or vacation and whether or not you plan to maintain it throughout the year.
Because life is more complicated than that, it is not always as straightforward to determine residency. To help clarify any lingering questions you have to determine whether the time you spent in a particular state was permanent or temporary. Permanency is determined by actions such as registering to vote, sending your children to a local school, or getting a driver’s license in the new state. This is important because the state of residence impacts where you report income from dividends, interest, or pensions.