I’m a Tax Expert: Here Are 4 Things To Know About Taxes for Out of State Jobs
By Sean Bryant,
2024-02-14
Living and working in different states can be difficult for things like commuting and work-life balance. But it can also cause a more complicated tax situation — the rules for filing taxes if you live and work in different states vary significantly from state to state. When it comes time to file taxes, there are several things that you should know if your home and work are in different states .
Some states have a reciprocity agreement with other states. This means that you can work in a neighboring state to the one that you live in without having to pay taxes in the state where you work. You must fill out an exception form if your work state has a reciprocity agreement. You will file income tax returns only with the state where you reside.
If there is no reciprocity agreement between the state where you live and the state where you work, you must file income tax returns in both states. You may owe income taxes in multiple states — assuming both states charge income taxes.
“In the absence of a reciprocity agreement, taxpayers may find themselves required to file tax returns in both their state of residence and the state where they work,” said Johan Garcia, CPA, MST at After Tax Cash . “This scenario often leads to concerns about possible double taxation. Fortunately, most states offer a tax credit to residents for income taxes paid to another state. The taxpayer should still confirm by consulting or discussing with their tax practitioner.”
There are currently 30 reciprocal agreements across 16 states and Washington, D.C. State reciprocity agreements come in a variety of forms. The following states have reciprocity agreements for residents of the mentioned neighboring states.
Arizona: California, Indiana, Oregon and Virginia residents are exempt from paying income taxes on wages earned in Arizona.
Washington, D.C.: If you don’t live in the district, you don’t have to pay income tax there.
Illinois: Residents of Iowa, Kentucky, Michigan and Wisconsin are exempt.
Indiana: Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin residents are exempt.
Iowa: Residents of Illinois are exempt.
Kentucky: Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin and Virginia residents are exempt.
Maryland: Residents of Washington, D.C.; Pennsylvania; Virginia and West Virginia are exempt.
Michigan: Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin residents 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: Indiana, Kentucky, Michigan, Pennsylvania and West Virginia residents are exempt.
Pennsylvania: Residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are exempt.
Virginia: Washington, D.C.; Kentucky; Maryland; Pennsylvania and West Virginia residents are exempt.
West Virginia: Kentucky, Maryland, Ohio, Pennsylvania and Virginia residents are exempt.
Wisconsin: Residents of Illinois, Indiana, Kentucky and Michigan are exempt.
Some States Have More Complicated Rules
Some states have additional rules for filing taxes as a resident who doesn’t work in-state. Connecticut, Delaware, Nebraska, New Jersey, New York and Pennsylvania have a “convenience of employer” rule, where employees are taxed in the state where the employer is located, unless the employer requires the work to be performed out of state. This can result in double taxation, if your employer is in a convenience rule state and you work remotely in a non-reciprocal state.
“With the rise of remote workers after the COVID-19 pandemic, states have gotten stricter and are constantly releasing new tax bills with new implications,” Garcia said. “[Convenience of the employer rules] complicate tax matters for remote workers by sourcing income to the state where the employer is located, regardless of where the employee physically works. This leads to situations where remote workers face tax requirements in a state they never physically enter, potentially resulting in double taxation, if their home state does not offer a credit for taxes paid to another state under these circumstances.”
Non-Employment Income From Another State Requires a Nonresident Tax Return
You must file a nonresident tax return if you have non-employment income from a state that is not your home state. Examples of non-employment income include:
Lottery or gambling winnings won in another state
Income from property sales in another state
Income from rental properties in another state
Income from consulting or contract work
Income from services that you performed within another state
Income that comes from your role as a partner or officer in an LLC, partnership or S-corporation.
The Military Has Different Rules
Active duty military members and their spouses have different tax rules. Under the Servicemembers Civil Relief Act, a service member doesn’t become a state resident for tax income purposes if the service member’s presence in the state is due to military orders.
Active-duty service members and spouses can maintain their legal residency in the state where they lived when they first joined the military, or they can establish residency in another state while they are stationed there. This can benefit service members who establish residency in income-tax-free states, like Florida or Texas.
The service member can maintain residency in their original state for as long as they are on active duty. When the service member leaves the military, the service member and spouse will be subject to the tax laws of the state where they are located, not the state they were in while in the service.
The Bottom Line
Filing taxes when you have an out-of-state job can be complicated. The rules will vary greatly depending on which state you live and work in. To avoid complications, let your employer’s HR department know which state you live in so they can appropriately withhold taxes.
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