Many individuals who have lived or worked in two or more states in the past year may be required to file multiple state tax returns. It's important to understand that filing taxes in two states or more doesn't affect your federal return but can impact your overall tax liability.
Are you wondering how to file taxes in multiple states? The short answer: Hire Multi-State Tax Specialists. Even if you get professional help, it's still a good idea to understand how multiple state tax filing works and when it applies, which we cover in this blog.
Common scenarios where you have to file two or more state taxes include:
1. You Live in One State and Work in Another State
If you make money in one state while residing in another, you should anticipate having to pay income tax for the state where you live. On the other hand, if you reside in one of the nine U.S. states that do not tax income, filing a state tax return may not be necessary. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
2. You Moved to a New State
If you relocate from one state to another during the taxation year, you must submit tax returns to both states. Either you’ll submit a part-year resident or non-resident return after the move depending on the relevant state laws. You will owe taxes to both states but not on the same income twice; each state will prorate your taxes based on the amount you earned in the state where you're filing.
3. You Conduct Business in Other States
Although states have a different income tax, sales tax, and property tax rates, the type of income your business earns in each state must still be reported to that state. Additionally, certain states require special tax filings for companies in multiple states. This complicates things, so we recommend hiring a tax practitioner if you do business in numerous states.
4. You Own Rental Property in Another State
Real estate owners who profit from a rental property in another state must file a non-resident return with the state where the property is located and pay state income taxes to that particular state. In addition, the rental income must be declared on the resident state tax return and the federal income tax return.
5. You and Your Spouse Work in Different States
The Military Spouse Residency Relief Act eliminates the dual taxation problem for servicemembers and their spouses. However, for other spouses, such as newlyweds, separated spouses, or those who commute to other states to work, filing state tax returns can still be complex as they may be required to file returns in multiple states and include their and their spouse's income.
An agreement between two states regarding reciprocal state taxes allows individuals who reside in one state to work in the other state and only owe state income tax in their state of residence. This agreement prevents double taxation (paying income tax to two different states on the same income). It creates a favorable outcome for workers employed in one state and living in another.
States with Tax Reciprocity
You can find the necessary tax forms on state websites (below). And remember, the amount of taxes you pay is based on the geographic location where you physically do your job. It doesn't matter if your out-of-state employer is located elsewhere as long as you don't travel to that location for work.
- New Jersey
- North Dakota
- West Virginia
1. Write Down all Places You Lived This Year
Writing down all the places you lived is essential when filing multiple state tax returns, as it can help you accurately calculate which states will collect income tax from you. Certain credits may also be available to you based on where you lived at certain times, so it is important to have those dates written down in case you are ever audited.
2. Determine Your Residency in Each State
Depending on the state, you may have different tax liabilities if you're a resident versus a non-resident. In some states, residents can be taxed on their income from all sources, both inside and outside the state.
The time you spend in a specific state determines your residency status. If you stay in one state for more than six months (183 days) or longer, you are likely considered a statutory resident and may be subject to taxes in that state.
To be considered a full-time U.S. resident by the IRS, you must have been physically present in the country for at least 31 days in the current year and a cumulative total of 183 days spread across the current year and the two preceding years. This comes out to the current year's days, 1/3 of the days spent in the second year, and 1/6 of the days spent in the first year.
Part-year residents live in the U.S. for part of the year but not for the entire period. As such, they may be subject to different tax regulations than full-year residents. Part-year residents have two categories: dual-status taxpayers and non-resident aliens with U.S. income sources.
Dual-status taxpayers are taxed as both resident and non-resident aliens during the year, requiring two separate tax returns, while non-resident aliens with U.S. income sources are only taxed on their U.S.-sourced income and must file one tax return reflecting this.
Non-resident aliens must only pay taxes on income earned in the U.S. or from an American source. For instance, an Italian entrepreneur operating a company in Italy and the States will only be taxed on the latter's income. Investment profits accrued in America that are not from a domestic origin are usually taxed at a rate of 30%.
3. Understand State Tax Laws
Before you file taxes, research the residency rules of all the states you were present in for at least 183 days during that year. For part-year residents, review the rules for each state to determine what income you must report for taxation; usually, earnings from interest, dividends, and pensions must be declared on taxes in the current state of residence.
Depending on your residency, you may be required to report all income regardless of your resident status. Some states require your income to be divided between states before they collect income taxes.
4. Collect Your Income Documents
Documents such as W-2s, 1099s, and other income documentation are required to accurately report income and determine the amount and types of deductions you may be eligible for, such as the Earned Income Tax Credit (EITC). You should also keep records of your receipts for certain expenditures, including medical bills, donations to charity, and business costs.
5. File Tax Returns
How to File Taxes if You've Lived in Two States
If you have lived in two states, your tax filing will depend on your income sources, which state you are living in, if you have changed jobs, and if those states have a reciprocity agreement. You will need to file part-year resident returns in both states. You must file separate state returns if you've had wages, self-employment, or property income in both states.
Before you begin, check the residency rules in each state, as requirements can vary. Some states consider you a full-year resident if you are present for at least 183 days, while others require you to split your income between two states before calculating your tax. We recommend completing your part-year or non-resident return before beginning on the resident return, making the process easier.
How to File Taxes for Multiple States When You Work Across State Lines
If you work and live in different states and there is no reciprocity agreement, you may have to file state income taxes in both states. Begin by filing a non-resident return for the state where you work. This requires information that will be used for the return to your home state.
After filing the non-resident return, file a resident return for your home state. This state will generally offer a credit for taxes paid to the other state to prevent double taxation. Before preparing your taxes, check the rules in both states, as they can differ.
- Know your residency in each state: This will determine which forms you must file and how you calculate your state taxes;
- Gather all of your income documentation: This includes your W-2s, 1099s, and other forms showing your income;
- Be aware of state tax deadlines: Each state has filing deadlines, so be sure to file your returns on time;
- Use tax software or a tax professional: Filing multiple state tax returns can be complex, so using tax software or a tax professional can help ensure your returns are filed correctly;
- Keep good records: Keeping good records of your income and expenses for each state is important, especially if you are audited.
Filing multiple state tax returns can be complicated and challenging, particularly if you need to know which form(s) to complete or the best way to apportion your taxes. To ensure you are compliant and get the best results, hiring our expert Chicago CPA firm is advisable. We have a strong track record of helping clients nationwide! Contact us today if you need to pay state income taxes.