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10 Tax Tips for People Working and Living in Different States

More Tax Tips for People Living and Working in Different States

woman on train with laptop
If you telecommute and your home office is in another state, you'll need to know about physical presence rules. Digital Vision/iStockphoto/ThinkStock

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5: Know Where You Don't Have to Pay Taxes

Where your employer's corporate headquarters is based doesn't have any effect on where you pay taxes, if you work at a branch office in another state. For example, you might live in Connecticut and work for a California-based company, but if your office is in Connecticut, that's the state that gets to withhold your taxes and require you to file a return, because you actually perform your job duties in Connecticut instead of California. The only complication to this is if your company inadvertently withholds taxes in its home state. In that case, here's some bad news – you may have to file a tax return there in order to get a refund [source: Moreno].

A different sort of complication arises if you work in the U.S.'s capital. The District of Columbia allows residents of any U.S. state an exemption from D.C. income taxes, although they still must file in their home states. Other multi-state regions aren't quite as accommodating. In fact, some would even argue that three states in particular are overtaxing workers [source: Moreno].

4: Be Wary of the New York-Connecticut Trap

As we previously explained, there are many states with reciprocity agreements, which save you from having to file tax returns in two places.

Unfortunately, though, not all neighboring states have such agreements. If you live in Connecticut but work in New York, you'll have to file both a nonresident tax return and pay taxes to New York, but don't neglect to file a tax return Connecticut as well, because that state still requires you to do so. You'll be allowed to claim a tax credit for income tax paid in New York on work you do there, by filing a Form CT 1040, Schedule 2, and attaching your New York return, according to the state of Connecticut's official online portal [source: Ct.gov]

Another problem is that the credit amounts to the lesser of the tax paid to New York or the tax that Connecticut would impose on the wages, means that if you earned out-of-state, so it could work out that you still owe taxes. If the amount owed is $1,000 or more, you'll also be required to file quarterly estimated tax payments to Connecticut, due on April 15, June 15, September 15, andJanuary 15. See, we warned you this was going to get complicated [source: Ct.gov].

3: File in the Right Order

Most people filing a state tax return only need to do so in a single state. For those who live in one state and work in another, the process is a bit more complicated.

There's a specific order in which you'll need to file multiple state tax returns. First, you'll file in the nonresident state or states in which you've earned income. For example, if you were not a resident of Missouri, but worked there for three months as a contractor, you'll need to submit your tax return to Missouri before submitting one to your home state. Keep in mind, you'll only need to do a tax return in your home state if it levies income tax against its residents.

The reason for filing in the nonresident state first is to determine the amount of credit or deduction you can claim for taxes already paid in other states before completing your resident or "home" state taxes. Even if you don't owe taxes in your home state — perhaps your only income for the tax year was earned in another state — you may still need to file a state tax return to get a refund [source: Caplinger].

2: Be Aware of Telecommuting Complications

For many years, Sarah worked and lived in New Mexico, the same state in which her employer was located. Then she and her family moved to Colorado, where she continued to work for her employer.

So, what's the problem? The solution is simple enough, right? Sarah will need to file taxes in the state in which she lives and works: Colorado. Most states have a physical presence rule, and Colorado is one of them. In short, this means Sarah's wages will be taxed where the work is done.

If Sarah lived in one of the five states that does not follow the physical presence rule (Alaska, Oregon, Montana, New Hampshire and Delaware), she'd have different rules to follow. The wages she earned would be taxable in the state where she lives and the state where her employer is located.

There are a couple of exemptions, including an exemption for work that could only be performed out of state. An employee who works in sales and covers an out-of-state sales territory is a good example of this exemption [sources: Schapiro, Avalara].

1: There May Be Corporate Tax Implications

Telecommuting from another state may not pose a problem for you, but it could for your employer. When a telecommuter works for an employer in another state, the employer establishes nexus, or a business presence, in the telecommuter's state. And this can have tax consequences. The employer may need to file a corporate income tax return in the state in which their employee is working.

In general, these corporate tax implications have little to do with your personal income tax. Although you could get some blowback from an employer who is reticent to spread its corporate reach to another state for just one employee, there's not much to worry about from an individual standpoint, aside from being phased out. The truth is, the location of your employer's corporate offices has nothing to do with your tax responsibility. You'll pay taxes in the state or states where you work, as long as they tax personal income.

Again, your employer mistakenly withholds tax in the state in which it is headquartered, you'll have to voluntarily file a return in that state. That way, you can get any refund you are due [source: Moreno].

Last editorial update on Feb 26, 2020 05:25:13 pm.

Related Articles and Resources

Sources

  • Caplinger, Dan. "Three Reasons You May Have to File Tax Returns in Multiple States." AOL.com April 8, 2014. (Feb. 21, 2020) https://www.aol.com/article/finance/2014/04/08/filing-tax-returns-multiple-states/20863005/
  • Connecticut State Department of Revenue Services. "Resident Working in Another State." Ct.gov. 2020. (Feb. 21, 2020) https://portal.ct.gov/DRS/Individuals/Individual-Tax-Page/Resident-Working-in-Another-State
  • Dzombak, Dan. "These States Have No Income Tax." USA Today. April 26, 2014. (Feb. 21, 2020) http://www.usatoday.com/story/money/personalfinance/2014/04/26/these-states-have-no-income-tax/8116161/
  • Kreisman, Bruce. "State Tax Consequences of Telecommuting." KOS. Jan. 4, 2014. (Feb. 21, 2020) https://web.archive.org/web/20141218143640/http://www.koscpa.com/newsletter-article/state-tax-consequences-telecommuting/
  • Massachusetts Department of Revenue. "Frequently Asked Questions Nonresidents and Part-Year Residents." (Feb. 21, 2020) https://pdfslide.net/documents/frequently-asked-questions-massachusetts-state-income-taxes.html
  • Moreno, Tonya. "Reciprocal Agreements: States that Do Not Tax Certain Out of State Workers." The Balance. (June 25, 2019) https://www.thebalance.com/state-with-reciprocal-agreements-3193329
  • Moreno, Tonya. "The Truth Behind 7 State Income Tax Myths." The Balance. Jun 18, 2019. (Feb. 21, 2020) https://www.thebalance.com/state-income-tax-myths-3193335
  • Pinho, Rute. "State Income Taxes on Income Sourced to Other Jurisdictions." OLR. Aug. 30, 2012. (Feb. 21, 2020) http://www.cga.ct.gov/2012/rpt/2012-R-0397.htm
  • Povich, Elaine. "'Road Warrior' State Income Tax Laws Vary Widely." The Pew Charitable Trusts. Dec. 12, 2013. (Nov. 6, 2014) http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2013/12/12/road-warrior-state-income-tax-laws-vary-widely
  • Schapiro, Scott. "State Tax Compliance in the World of Telecommuting. " Councilofnonprofits.org. May 22, 2018. (Feb. 21, 2020) https://www.councilofnonprofits.org/thought-leadership/state-tax-compliance-the-world-of-telecommuting
  • Turque, Bill. "Court: Md. has been double-taxing those who earn income in other states. " Washington Post. May 18, 2015. (Feb. 21, 2015) https://www.washingtonpost.com/local/md-politics/supreme-court-rules-maryland-income-tax-law-is-unconstitutional/2015/05/18/1e92ee7a-d16f-11e4-ab77-9646eea6a4c7_story.html
  • Wolf, Richard. Supreme Court: "Two states can't tax the same income." USA Today. May 18, 2015. (Feb. 21, 2020) https://www.usatoday.com/story/news/nation/2015/05/18/supreme-court-double-taxation/22066863/

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