Where to Pay Taxes If You Live and Work in 2 Different States?

Landing your dream job is probably one of the best feelings in the world. But what happens if your work and your place of residence are in two different states? This occurrence is common and happens to many people in the United States. Some would prefer commuting to and from work instead of just moving into a new apartment in the new state because of all the added stress it may bring.

So if you are one of the many people facing this dilemma, you may have wondered where you should be paying your taxes. You may have asked yourself whether you need to file your income taxes in both states or only in just one. In this ultimate guide, we will answer all your questions and help you with filing your taxes.

Where Do I File My Taxes?

Living and working in two different states is a common dilemma, especially for people residing in the metro area. Although filing your taxes may get a bit tricky because of this circumstance, there is no need to panic. You do not have to stress about paying twice as much as your original tax bill.

When it comes to filing your tax returns, an essential rule of thumb to remember is the difference between non-resident and resident income taxes. You also need to be aware of the tax exemptions available in both your work and home states.

What are Resident and Non-Resident Income Taxes?

Generally, you need to pay your resident income tax to your home state, while your non-resident income tax to the state you are working in. Your resident tax requires you to put all your income sources in and out of the state.

Meanwhile, your non-resident taxes only require you to list the income you have made while working in the other state. This payment also covers non-employment income, such as those coming from rental properties, contract work, lottery winnings, and many more.

What are Some Exceptions to my State Income Tax?

Although people living and working in two different states generally have to file and pay their resident and non-resident taxes, there are some exceptions to this rule. For instance, several states do not require income taxes for their residents and workers, while others have a reciprocal tax agreement with some of their neighboring states.

If Your Work or Home State Does Not Require State Income Tax

You would be exempted to pay your state income tax if the state you work or live in does not require you to file one. In the United States, this exception only applies to people living or working in nine states, namely Washington, Alaska, South Dakota, Nevada, Florida, New Hampshire, Tennessee, Wyoming, and Texas.

So if you work in one of these states but live in a different one, you would only need to pay your resident income tax. Similarly, if your place of residence is in one of these states, but you work in a different area, you would only need to pay your non-resident income tax.

For instance, people living in Washington and working in Idaho would only have to pay their non-resident income tax. Otherwise, you would need to file your resident income tax if you live in Idaho but work in Washington.

If Your Work or Home State Has a Reciprocal Tax Agreement

Besides the exception above, you also do not have to worry about filing and paying your income tax in two different states if your work and home states have a reciprocal tax agreement. This mutual tax agreement allows you to work in a neighboring state while residing in a different one without filing a non-resident income tax return. In addition to this, you will only need to file a single state income tax return.

Some of the states with this agreement include Arizona, Columbia, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin. But it is also essential to remember that this reciprocity does not apply automatically.

To make use of this agreement, you would need to fill up an exemption form. You can ask your employer or the Human Resources department of your company about this. Otherwise, you will continue to file and pay for two different state income taxes.

What if These Exemptions Do Not Apply to my Situation?

If you are living or working in a state that does not have any of the mentioned tax exemptions above, you would need to file two tax returns in your home and work states. However, you will still be eligible to claim a credit on your resident tax.

For instance, Mississippi residents would have to file for both their resident and non-resident taxes if they work in Louisiana, Arkansas, or Alabama. Because filing for multiple income tax returns is a bit tricky and time-consuming, some people would hire an accountant to do the task for them. But you can also try out several online programs to guide you in filing your tax returns.

Living and Working in Two Different States

Filing and paying your taxes is a requirement for every adult. But this task becomes more complicated if you live and work in two different states. Depending on your job location and residence, you would generally have to pay non-resident and resident income tax returns on both states. But there are several exemptions to this rule.

If you happen to live or work in a state that does not require any income tax returns, then you do not have to stress about filing and paying your taxes. You may also be lucky enough to be working in a state with a reciprocal tax agreement with its neighboring areas. 

But whatever your situation is, we highly suggest talking to your employer or your Human Resources department to know whether you are eligible for these tax exemptions. If not, you can also hire an accountant or visit online programs to guide you in filing your tax returns.

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