Where do I pay my state taxes, I live here and work there?
You found the job of your dreams, however, the position is in another state. The location is close enough for you to commute to work every day so you wouldn’t have to move, but still, you are faced with the one question of how and where to pay your state income taxes.
The general rule is that you have to pay non-resident income taxes for that state you work in and pay resident income taxes in the state where you live, all this while filing tax returns for both states. Be that as it may, the general rule has many exceptions. The one exception occurs when one of the states doesn’t impose income taxes. Another exception occurs when a reciprocal agreement prevails between two states.
What if there are States with no State Income Tax?
There are seven states: Alaska, Nevada, Florida, Texas, South Dakota, Washington, and Wyoming that have no income tax at all for residents. There are two states: New Hampshire and Tennessee that tax only on interest income and dividends. If you are working in one of those nine states, but live in one of the other 41 states, including the District of Columbia, that does have state income taxes, generally, you will pay only the resident state income taxes for that state where you are living. As alike, if you are living in one of those nine states and work in a state that has state income tax, you would only have to pay nonresident taxes for that state where you are working.
Here’s an example, say you live in Virginia and work in Tennessee, you would pay the Virginia resident state income taxes. As well as, if you worked in Virginia and lived in Tennessee, you would then pay the Virginia nonresident state income taxes. However, in these cases, you would only have to file a single state income tax return.
States that have Reciprocal Agreements
What if you commute every day to Illinois and live in Wisconsin? It just so happens that Illinois and Wisconsin share what we know as a reciprocal tax agreement. In this case, your Wisconsin employer would deduct the state of Wisconsin taxes from your paycheck, and none for Illinois. Same as if you live in Illinois but work in Wisconsin, your Illinois employer would only deduct Illinois resident state income taxes from your paycheck. In both cases, you would only have to file one state income tax return.
States that do not have Reciprocal Agreements
If you are unfortunate enough to work in a state that has no reciprocal agreement with the state you live in, (for instance, Indiana), then you will have to file your income tax returns for both of the states. However, you would be able to claim a credit on your resident state income tax returns for the state income taxes that you had paid for the nonresident state. The outcome is that you actually pay taxes for only one state, even though you have to deal with the difficulty of filing returns in both the states.
However remember that reciprocity is not an automatic. You need to file a request with your employer to deduct your income taxes based on your state of residence and not where you work. If you do not make a formal request with your employer, you will automatically be taxed by both states and you will be required to file two state tax returns.
When you have to File Multi-State Income Tax Returns
If your tax situation is not complicated and straightforward there are many online tax preparation software programs that come with instructions on how to fill multi-state tax returns. If you are faced with the inconvenience of living in one state and working in another, and filing your taxes on your own seems overwhelming to you, give the daunting task of filing your state taxes to an attorney.
At Consulting Services Tax & Accounting we are the tax problem solvers and we are ready to help you with all of your tax, accounting, payroll and business needs. We pride ourselves in being able to take any tax problem and break it down to reach an end result of an accurate and completed tax return. We are conveniently located off of University Avenue on Segoe Road, in Madison WI.