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Non-Resident State Tax Returns: All You need to know

Non-Resident State Tax Returns: All You need to know

It is not as unusual as one would think of someone who lives in one state but is engaged in another state, working for his money or doing business. This happens quite often among taxpayers who live near the state's borders. The situation can complicate things a bit when it comes to paying taxes, but not for most if you understand the rules. If you have made money in another state, you will have to file a non-resident income tax return in that state because this situation is due to a situation in which you worked, but you did not have any residence. You must file this in addition to a tax return with your country of origin, but this does not mean that you will pay double tax on this income.

Let's take a look at the basics to help you decide if you want to file a non-resident return and, if so, what the consequences will be in it for you.

When you should file for Non-resident Return

You must send a non-resident statement if you worked or earned income in a state where you are not a resident. For instance, if you live in Chicago and works in California, you will file a non-resident statement in California and a tax return for residents of Chicago. You also need a non-resident declaration if the employer has withheld taxes from the state of the wrong state and you want a refund from that state, or if you received income while working in a country other than the one in which you reside in the state.

It may not be necessary to file in a mutual state

Some states have bilateral agreements allowing residents of other states to work there without filing a non-resident declaration. This is common in neighboring countries where it is okay to work. These agreements are called “reciprocal agreements.” You may not be compelled to file a tax return in the non-resident state if your residency status and the state you work in have entered into such an agreement. These agreements generally only cover income or income from real activities. Moreover, if you have been taxed with non-resident status, you must still make a refund to get the money back.

Please check with the tax authorities of non-resident states to ensure your tax reporting obligations. Besides, the human resources department of the employer should be able to tell you if you have one. You can also consult with tax authorities if you reside in one of the mutual states to determine which other states have reciprocity with your country.

Income other than taxable work for non-residents

Most states apply to state income taxes, including non-resident income, so you do not have to work in a state to pay taxes. These other types of income may also be subject to tax for a non-resident:

  • Income as a partner in a partnership, an LLC, or a company. Membership status as a member may be subject to taxes due in the state where the company is located. Note that this is not true if you are just an employee of the company.
  • Income from services rendered in the state. For instance, a person who repairs equipment that crosses state boundaries to repair a car in someone's garage must file a non-resident return.
  • Gaming or Lottery winnings are taxable in the state you won. You must, therefore, submit a statement.
  • Income from the sale of real estate in a state requires a tax return for non-residents as well as rental income.
  • Doing business, or a profession in a state. For example, if you worked as a consultant or banker or freelancer in another state, you must file a non-resident return.

Will you pay taxes twice?

Do not be afraid because the Supreme Court of the United States of America has got you covered. The court ruled in May 2015 that the same income cannot be taxed legally by two states. The judgment was not taken casually, as it would cost some States considerable revenue. Judges discussed and listened to verbal arguments for more than six months before finally voting for five votes to 4, in that states had to exempt from taxes profits and other sources of income taxed elsewhere. So you won't pay twice on the same income.

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