If you've earned income in multiple states or live in one state and work in another, you are expected to file multiple state income tax returns.
While the need to file a tax return doesn't change the federal tax return in any way, it can still make tax season more stressful. Therefore, it is essential to know when and how it may be necessary to file multiple state tax returns.
Four Reasons To File Taxes In More Than One State
Certain situations may require you to file taxes in more than one state. The common scenarios are as follows.
Relocation
If you relocated from one state to another during the fiscal year and both states withhold income taxes, you will pay state taxes on a prorated basis, depending on how much time you have lived and worked in both states.
You Reside In One State And Work In Another
If you or your spouse is married on a joint filing, working in a state other than where you live, you may need to file multiple state income tax returns. But in general, there is no need to pay taxes in both states.
Instead, you would be paying taxes to the state where you worked unless the two states had a mutual tax agreement. If so, you can pay taxes to the state where you reside.
"A reciprocal state tax agreement is an agreement whereby one state agrees not to tax employee compensation, subject to the withholding of the other state's employer," said Brian Thompson, expert accountant, and tax lawyer. “These agreements only apply to the compensation of employees.
However, please note that this does not apply if you live in one state and work remotely for a firm based in another state. Instead, what is required of you is to file a return in the state where you live and work.
Do You Own An Income Property In Another State?
Any taxable income you earn from an extra-state property or another source may require you to file an out-of-state tax return. You must also declare the income on the declaration of residence.
You Are An Entrepreneur Working In Multiple States.
“If an independent taxpayer works in more than one state, there is no effect on his federal tax obligations,” explains Thompson. "However, this taxpayer may have to file income tax returns and pay income taxes in more than one state."
As a result, things can get complicated quickly with the more significant number of states you operate in, and you may need the help of a tax professional to make sure you're okay.
Filing A State Income Tax Return As A Non-Residents
Each state has specific criteria for determining your state of residence. For example, the state of Maryland treats you as a resident in two ways.
Your permanent residence is or has been in Maryland.
Your permanent residence is outside of Maryland, but you have lived for more than six months during the year and have been physically present in the state for at least 183 days.
For your state of residence, you will file the average tax return for that state, if necessary. But if you need to report income in another state, you may need to fill out additional forms.
For example, Utah requires that non-residents who earned income in Utah during the fiscal year file a regular state income tax return with all income from all sources and report the amount of revenue from Utah sources. (Although Utah only makes exceptions for income from a partnership, LLC, S corporation, or trust.)
How Multi-state Returns Affect Your Federal Profitability
It does not affect Your federal income tax return and is distinct from your state income tax return. Report the federal statement to the IRS and the state's statement to the state agency, such as a state department, commission, board, or treasury.
While you can use some specific information from the federal income tax return for your state returns, it probably doesn't go both ways.
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