Let’s say you live in New York City, but a drastic rent increase encourages you to look for a much cheaper and more spacious apartment in New Jersey. Still, your workplace is located in the Big Apple and every day you will have to cross the state border. That would be a major tax change and you may need to file more than one state income tax return.
Although common for remote employees, it also applies to employees crossing a state border to get to their workplace. Other circumstances, like moving during the year, could also affect the status in which you file taxes, as well as your deductions.
TELEMUNDO 47 explains how a move between states could affect your tax return this year.
HOW SHOULD I FILE STATE TAXES IF I LIVE AND WORK IN DIFFERENT STATES?
If you earn income in one state while living in another, you will need to file a tax return in your state of residence. You may also need to file a tax return for the state where your employer is located or any state where you have a source of income.
Keep in mind that a person who lives in one state but works will have tax obligations in both states, but will generally receive a tax credit in their state of residence to eliminate double taxation on that income.
For example, if you were a resident of New York State for the entire year or part of the year and your income originated in another state and was taxed by it, you can claim a non-refundable resident credit. This credit is allowed only for the part of the tax that is applied to income from and taxed by the other tax authority while you were a resident of New York State.
DO I HAVE TO FILE TAXES IN BOTH STATES?
It will depend on the state. Some states have an agreement that out-of-state workers only have to apply in the state where they live. These states have what is known as a reciprocal or reciprocal tax agreement.
But if your work status and your home state do not have reciprocity, you will have to file two state tax returns: one as a resident and one as a non-resident.
It is also important to note that if you live or work in one of the states that do not charge income taxes, you may not have to file a return for that state. States that do not collect income taxes include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
WILL I PAY DOUBLE TAXES IF I HAVE TO FILE IN MORE THAN ONE STATE?
Congress passed a law in 2015 prohibiting double taxation. This means that if you live in one state and work in another, only one state can tax. You may still have to pay income taxes in more than one state, but you can’t be taxed twice for the same money. You won’t have to worry about paying income tax in multiple states, even if you have to file more than one return.
When you live in one state and work in another, the state you work in usually collects taxes and will withhold the corresponding amount from your paycheck each week. In this situation, you will have to pay state taxes.
At the end of the year, you will file two returns. A declaration of nonresident status in the state you worked in, where you list only the income you earned in that state and only the taxes you paid to that state.
Then, you will file a declaration of resident status in the state where you live. On this return, you will list all of your income, including what you earned out of state. Usually, there is a place on the return where you can file and get credit for the taxes you paid to your work status.
WHAT ARE RECIPROCITY AGREEMENTS?
Through reciprocity agreements, you can live in one state and work in a neighboring state without paying taxes there. Instead of paying taxes where you work, you will pay taxes in your state of residence, which is the state where you live.
Pennsylvania and New Jersey, for example, have such an agreement. If you live in Pennsylvania but work in New Jersey, you will pay your taxes to Pennsylvania. New Jersey will not withhold any state money from your paycheck. Of course, they will continue to withhold federal taxes as needed.
Seventeen different states have these types of agreements, so you should ask your employer if any apply to your situation. The payroll department of your company must be aware of absolutely any applicable reciprocity agreements. If not, your state Department of Revenue office will be able to answer your questions.
Now, let’s say you start a new job in New Jersey and file a tax exemption form because you live in Pennsylvania. However, the payroll department does not make the adjustment. When you receive your paycheck, you see that your employer withheld New Jersey income tax from your check even though it wasn’t supposed to.
There are two ways to fix this problem: You can ask the payroll department to correct the error and refund the money, or you can wait until the end of the year. At the time of your tax return, you will need to file a Pennsylvania tax return and pay what you owe. You will also need to file a New Jersey nonresident state tax return requesting a refund of taxes you paid in error.
HOW LONG DOES I NEED TO LIVE IN A STATE TO FILE TAXES?
Let’s say you live in Pennsylvania and you work in New Jersey. There is a public transportation system that operates buses between the two states, but they have really cut their service during COVID. So you decide to live for a few months in New Jersey with a relative to be closer to work.
Because you live in Pennsylvania and because of the reciprocity agreement, you generally would not pay taxes to New Jersey. But how long can you live there before New Jersey claims the taxes that would go to Pennsylvania? That may vary by state.
It’s common for a state to tax you if you’ve been there for more than half the year or 183 days. These days do not necessarily have to be consecutive. You can go back and forth from state to state, but once you’ve been around for more than 6 months, most will collect those taxes from you.
Some states will allow you to work in the state for 2 to 60 days before they start withholding taxes. Others will start collecting taxes after you earn a certain amount.
Other states, like Georgia, have more specific criteria. This state will withhold state taxes from your wages after you have worked more than 23 days, earned more than $ 5,000, or earned 5 percent or more of your income for the year.
Now let’s say you move to Pennsylvania but keep your job in Maryland. Because Pennsylvania and Maryland also have a reciprocity agreement, you would now pay your taxes to Pennsylvania. But if you move in the middle of the year, you’ll pay six months of taxes to West Virginia and six months to Pennsylvania.
If you live in Pennsylvania and work in New Jersey, you pay taxes where you live because the two states have a reciprocity agreement. But six months into the year, you decide to move to New York. New York and New Jersey have no agreement. In this case, you would pay the first six months of taxes to Pennsylvania where you lived and the last six months to New Jersey where you worked.
If you permanently move to another state, you will need to file two state returns: one for each state you lived in during the tax year (assuming both states collect income taxes).
You may be able to claim residency for part of the year, allowing you to divide your income between the two states instead of paying taxes twice. Keep in mind that each state has its own rules for determining residency and how you should indicate your state on the forms.
HOW SHOULD I FILE STATE TAXES IF I WORK REMOTELY FOR AN OUT-OF-STATE EMPLOYER?
Different states have different tax rules. Your income tax liability may change depending on the state you are in, but you should expect to file taxes for both states: a resident return for the state where you live and a separate non-resident return for the state where you work.
CAN I FILE A JOINT STATEMENT IF MY SPOUSE WORKS IN A DIFFERENT STATE FROM MYSELF?
Yes. For your federal income taxes, you can file a joint return and report all the income they earned. For state taxes, you will need to present both income on the declaration of the state of residence (if your state collects income taxes). And they will have to file a separate return for the state where you or your spouse work and report only the income earned in that state.
For more details, you can read the IRS fact sheet here.
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