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

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

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.

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?

This article was updated on April 4, 2017.

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.


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