Posted by The TaxAdvocate Group, LLC

Do You Have to File a Non-resident State Tax Return?

Do You Have to File a Non-resident State Tax Return?

It is more common than you might think for someone to live in one state and work in another. You might need to file a non-resident income tax return if you earned money in a state where you do not live, as well as a resident income tax return in your home state. But some states offer exemptions to this rule, and the federal government won't allow you to be taxed twice on the same income.


Tax arrangement between reciprocal states

Some states have mutual agreements between them that allow residents of other states to work there without filing non-resident state income tax returns. This is more common in neighboring states, where crossing the border to work is common among residents.

You probably won't have to apply for non-resident status if your home state and the state you work in have reciprocity, but these agreements usually only cover the income you earn from your actual work. Filing and paying income tax on unearned income may require filing a return.

You will need to file a return in your work state, although you don't have to pay taxes there to get a refund if your employer incorrectly withholds taxes from your paycheck, despite a mutual agreement being in place.

Earned income includes wages, salaries, commissions, bonuses, tips, pretty much anything you get in exchange for the services you provide as an employee.


States with reciprocity agreements

The District of Columbia and sixteen states have reciprocity to one or more states as of 2020. These are work states and not residency states: Arizona, District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin.

New Jersey had an agreement with Pennsylvania for almost 40 years before its reciprocity ended on December 31, 2016. Still, the agreement between those states has been reinstated and remains in effect as of 2020.

These agreements are subject to change from time to time, so check with your non-resident state's tax authority to secure your filing obligations there. 


States without income tax

Nine states impose no income tax on earned income as of 2020, so an employer in one of the states will not withhold tax if you work in that state. These states are Florida, Nevada, Alaska, New Hampshire (investment income tax only, not income tax, South Dakota, Tennessee (investment income tax only, not income tax), Texas, Washington, and Wyoming.

However, you must report this income on your home state return and your federal income tax return.


Are you going to pay your taxes twice?

You should not pay state taxes twice for the same income, even if you work in a state that is not your home state. The United States Supreme Court ruled in Treasury Comptroller Maryland v. Wynne et ux in 2015 that states cannot legally tax resident income earned outside the state if they impose income tax on non-residents in the state.

The measure will cost some states significant tax revenues, and the decision was not easily taken. The judges debated and listened to the oral allegations for over six months before finally voting 5-4 that states should exempt taxes imposed elsewhere.

The 2015 Supreme Court ruling states that states must include certain mechanisms in their tax codes that generally prevent the same income from being taxed twice in states that tax income of residents not earned within the state and income of non-residents earned in the state.

If there is no reciprocity, you will need to file a non-resident return regarding your employment status, but no fees will be due under this landmark ruling. Your home state must provide you with a tax credit or other tax adjustment form you paid to other states.


When to file a non-resident return

You must file a non-resident return if you have worked or received income in a non-resident state if that state does not have reciprocity with your state.

You must also file a return there if you have not provided the necessary documents to your employer to release you from withholding tax. The provisions of a reciprocity agreement do not occur automatically. You must submit a form specific to your state to your employer to ensure that taxes on your employment status are not withheld from your pay there. Otherwise, you must file a non-resident return.

Ensure your employer withholds taxes from the state you live in, or you might have a nasty surprise when it is tax time. You could end up owing your state a fair amount of money when taxes come due.


Taxable income from non-employment income

You don't have to work in a state to pay taxes because most states tax all kinds of income you earn. Other types of income that may be taxed for a non-resident include:

  • Carrying out a business, trade, profession, or occupation in one state: You must file a non-resident return if you have worked as a consultant or entrepreneur in another state.

  • Income as a partner in an LLC, partnership, or S corporation: Your participation as a partner may be taxed in the state in which the corporation is located. However, this does not apply if you are simply an employee of the company.

  • Income from the sale of a property requires a return of non-resident income when the property is located elsewhere than its original state and the rental income earned there.

  • Lottery or gaming winnings: they are taxable in the state you won, so you will have to file a return there.

  • Revenue from state-level services: for example, an independent roofer who crosses state borders to repair the roof of someone's home must file a non-resident return in the roof owner's state. 

You are not required to pay interest on income for that state if you have a bank account in a state where you do not live and do not receive interest. You must claim and pay taxes on this account in your federal account and income tax returns from the home state; however. 


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