How to Do Taxes if You Live and Work in 2 Different States

Gabrielle Karol
Posted

In many cities, a significant percentage of the workforce travels into the city every day from another state.

For the Indianans who work in Louisville, Kentucky or the New Jersey-ites who take the train into New York City, crossing state borders might not mean a lengthy commute. But it does mean having to deal with how to pay taxes for both your “home” state and your “work” state.

Commuter

First off, don’t panic! Living and working in two different states does not mean that you’ll be paying twice as much in taxes. Read on for help on how handle your taxes so that you don’t pay more than your fair share.

Reciprocal Agreements

Some states have reciprocal agreements with each other, so that you can work in a neighboring state without paying taxes there. Check out this list of “work states” for more information about their reciprocal agreements:

  • District of Columbia: If you don’t live in D.C., you don’t have to pay income tax for the district
  • Illinois: Residents of Iowa, Kentucky, Michigan and Wisconsin are exempt
  • Indiana: Residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin are exempt
  • Iowa: Residents of Illinois are exempt
  • Kentucky: Residents of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin are exempt
  • Maryland: Residents of D.C., Pennsylvania, Virginia and West Virginia are exempt
  • Michigan: Residents of Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin are exempt
  • Minnesota: Residents of Michigan and North Dakota are exempt
  • Montana: Residents of North Dakota are exempt
  • New Jersey: Residents of Pennsylvania are exempt
  • North Dakota: Residents of Minnesota and Montana are exempt
  • Ohio: Residents of Indiana, Kentucky, Michigan, Pennsylvania and West Virginia are exempt
  • Pennsylvania: Residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are exempt
  • Virginia: Residents of D.C., Kentucky, Maryland, Pennsylvania and West Virginia are exempt
  • West Virginia: Residents of Kentucky, Maryland, Ohio, Pennsylvania and Virginia are exempt
  • Wisconsin: Residents of Illinois, Indiana, Kentucky and Michigan are exempt

Additional information regarding these individual state exemptions can be found at the above-listed links.

If your work state has one of these agreements, you’ll need to fill out an exemption form. (If your work state is not on this list, check out the next section.) This exemption form will relieve you of the burden of paying income taxes to the state in which you work, so you only need to pay taxes to the state in which you live. There are different exemption forms to fill out depending on your state: Talk to your HR representative to obtain your correct form, or find your exemption form here.

Note: Even if you live and work in states that have a reciprocal agreement with each other, the reciprocal agreement only covers employment income. If you have non-employment income coming in from your “work” state, you will also have to file a nonresident tax return, despite the fact that there is a reciprocal agreement in place. (See below.) You should also consult with a properly qualified accountant or tax specialist for additional guidance on state-specific tax concerns.

If Your State Doesn’t Have a Reciprocal Agreement

If the state you work in does not have a reciprocal agreement with your “home” state, you’ll have to file a resident tax return and a nonresident tax return.

  • On your resident tax return (for your “home” state), you list all sources of income, including that which you earned out-of-state.
  • On your nonresident tax return (for your “work” state), you only list the income that you made in that state.

In most cases, your “home” state will allow you to claim a tax credit on your resident tax form for the taxes that you paid to your “work” state.

Non-Employment Income

You’ll also need to file a nonresident tax return if you have non-employment income from a state that is not your “home” state. Non-employment income includes, but may not be limited to:

  • Income that comes from your role as a partner or officer in an LLC, partnership or S-corporation
  • Income from services that you performed within another state
  • Lottery or gambling winnings
  • Income from property sales
  • Income from rental properties
  • Income from consulting or contract work

And that’s it! That wasn’t too complicated, now was it?

More From LearnVest

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The Alternative Minimum Tax: What it is, and why you may not want it.
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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies.

  • Kimiecjc

    What do we do if my wife works from a home office in Ohio but her company is based in Virginia and she is getting taxes taken out from Virginia? 

    • Tim

      As you may know, the state to which state income tax is due is the state in which the work is *performed*, not the state in which you reside or the state in which the company is based. So you’re correct that withholding Virginia state income tax for work your wife does while in Ohio isn’t necessary or desirable. (The fact that she happens to also reside in Ohio is irrelevant for the question of which state gets the tax.)

      Your best option is to get her company to change her withholding state to Ohio, since the income she gets from days she works in that home office are from Ohio sources. If you can get them to do that, and if she never travels to Virginia for work (i.e. never generates any Virginia-source income by doing work there at any point in the year), then you won’t have to file a Virginia tax return. This is the best-case scenario, and the odds are that it doesn’t apply to you because she probably travels to Virginia for work at least once a year.

      If she works mostly in Ohio but occasionally in Virginia, then you’ll have to file returns in both Ohio and Virginia, following the instructions in the “If Your State Doesn’t Have a Reciprocal Agreement” section. If her company is able to withhold against whichever stated she’s working in on a given day, then you’ll be in good shape come April 15th.

      If her company can’t allocate withholding to the state where each day’s hours were worked (I’m in this boat) or isn’t willing to withhold for any state other than Virginia, you’ll also need to make estimated tax payments in whichever state isn’t getting income tax withheld, or you’re likely to owe penalties when you file your taxes having withheld $0 throughout the year. (I know Virginia does this; I assume Ohio does, but I’m sure you can find out easily.) This will mean you pay double taxes (via withholding to one state and estimated tax payments to the other) on the income earned in the state where no withholding happens, and then when you submit your taxes you’ll get a massive refund from the state where the unnecessary withholding happened.

      If having less money throughout the year and then getting a big “bonus” at tax time is a good thing for you (e.g. if you’re likely to save that lump sum rather than blow it, or to live below your means throughout the year because there’s a little less money coming into your bank account each month), then that might be a good thing, but if you’d be better off not over-paying the taxes throughout the year, you can adjust your state withholdings by claiming more exemptions to reduce the amount of tax you pay to the state where withholding is happening. But you need to estimate your taxes carefully to make sure you don’t withhold too little, or you might end up owing penalties to that state as well…

  • Matt

    What should I do if I now live here in California but my work is located in Texas? Here’s the kicker, I travel all the time, I do a lot of work in the Louisiana and Mississippi area and am never really in Texas or California (I work on gas pipelines)…I feel like out of one yr, I am only in California for about two months worth…what is the correct method I should be doing??? Thanks

  • Imanoel

    I have worked for my company in Atlanta GA since Nov. 2013.After that I transferred to Columbia SC. I am resident of GA Just work weekdays in Columbia and live in my house weekend in GA. what should I do for my Tax?Thanks.

  • JulesARS

    We currently live in KY. My husband was just offered a permanent job in TX. This job requires him to live and work in TX. He begins in 1 week and will be going a head and moving there. I will be staying in KY to get our home ready to rent or sell. In the meantime, I will also be working a part time job which I just began a week ago. My question is, how do we file the state return under these circumstances? My husband will already be relo’d, but I will not. TX does not require a state return, KY does. Do we file based off my husband and file as a resident who moved during the year? Do we have to file separately? Is there anything we need to do to show my husband has relocated?

  • floridabound

    If we live in our camper, have a permanent mailing address in SD and my company is based in SD but we live in our camper in Florida, what are mine and company requirements tax wise? What corp responsibility would my company have in Florida?

  • Alexandria

    HI, Thanks for the article. I am getting a job in Ohio and I live in MI. If I am tax exempt in Ohio and have no withholdings taken out of my checks then I will owe a total tax amount in MI for that year, correct? I guess what I am asking is how do I go about paying the MI tax if I have no withholdings in Ohio? I look forward to your response.

  • clarence

    What if you work in two states (California and Washington state)? You earned a small portion of your 2013 income in California (first 3 months of the year) and then move to Washington where you work the remaining 9 months for the same company where there is no state tax and change residences. How would I file? Thanks for your help.

  • Neal

    My son is a college student. He lives in Delaware, and worked jobs in Maryland and Pennsylvania. We have to file Federal, and 3 states for him. What order should the state returns be done in?

  • Tim

    I work in Maine and live in New Hampshire. Do I need to fill out a New Hampshire state tax return?

  • Zbigkid

    I worked for a very poorly run company located in Pittsburgh that refused to withhold taxes for the state in which I lived. I was a remote sales person, and ITS BEEN standard practice for every prior employer to withhold taxes for my state. This company was obtusely assanine and employee hostile, and obviously too lazy to do so. the company is called kwantera.

  • otuns

    presently i do not work and i leave georgia,how do i get evaluated so as to pay tax