Tax filing season may be the single best argument for living a life of simplicity. The Federal Tax code is arcane, but state tax codes put it to shame. Answering a question as simple as, “Where do I file my state income tax returns?” becomes a confusing labyrinth that leaves the average filer casting about for answers. So, do you have to file taxes in multiple states? Let's discuss.
In this post we answer FAQs about filing multiple state tax returns. If your don't find the answer you need here, consider enlisting a tax professional. We're only scratching the surface here.
I live in one state, but I work over the border. Where do I file?
The general rule of thumb is that you need to file taxes where you earned the money. That means you need to file a nonresident state return in the state where you worked.
If you have non-work income (such as interest, income from side hustling, etc.), you’ll declare that in the state where you live.
Most people who live in one state and work in another must file two state income tax returns (one in the state they live, and the other in the state they work).
The major exception to this rule is if you work in a state with reciprocity agreements. Reciprocity agreements are mainly a midwest and east coast phenomenon. They allow employees to withhold and file only in their state of residence. This simplifies taxes considerably. Thomson Reuters keeps an updated list of all states with reciprocity agreements.
I work remotely, where do I file income taxes?
You file and pay income taxes where you earn the money. This means that a remote worker files his or her state income tax return where they are a resident.
The waters become murkier if you sometimes travel for work. As an employee, your employer withheld income for all relevant states. You need to file income tax returns in all those states (plus your resident state). You may owe money to a state even if you only worked in that state for one day. An extreme example of this is NFL players (and other pro athletes) who owe taxes in each state where they play.
Self employed consultants face even trickier situations. Self employed people file an income returns in all states where they did business. If you were physically in a state, you probably need to file a return for that state.
TurboTax and H&R Block both have extensive employment questionnaires that can help you clarify where you need to file. Most people will find that the software packages answer their questions (one notable exception this year is Credit Karma Tax, which doesn't allow multiple state returns). However, traveling employees and business owners face unique filing challenges. This is one area where a tax professional can help you untangle a complicated web of earnings.
I work remotely from a state that doesn’t collect income taxes. My employer is located in a state that collects income taxes. Do I owe someone money?
Alaska, Florida, South Dakota, Nevada, Texas, Washington and Wyoming do not collect income tax. If you live and work in those states, you don’t have to file an income tax return in those states. This is true even if your employer’s physical headquarters are in a high tax state.
You don’t need to file an income tax return unless your employer withheld taxes to another state. Then you need to file to get your money back.
I have rental properties in 3 states, and I work in a fourth. Where do I file my state income tax returns?
We love passive income, but it can be a headache come tax time. If you own properties outside of your resident state, then you need to file a state return in every state where you collect property income. Real estate expenses like software or bookkeeping fees need to be prorated across states, so that you don’t double count expenses. You also need to file an income return in the state where you worked.
I moved part way through the year. Where do I file?
If you move during the year, you’ll need to file state income taxes in both states where you lived. Each state allows people to file “partial year resident” returns. You will pay taxes to both states.
How much will you pay? It depends on how much you earned in each state. In general, states calculate what your total income bill would be had you lived the entire year in their state. Then they prorate the bill based on your actual earnings in the state.
Say you earned $40,000 in Minnesota and $60,000 in Wisconsin.
Had you earned the entire $100K in Minnesota, you would owe Minnesota $5914 in state income taxes. However you only earned 40% of your income in Minnesota. So you own Minnesota 40%* $5914 or $2366.
Had you earned the entire $100K in Wisconsin, you would owe Wisconsin $5918 in state income taxes. However, you only earned 60% of your income in Wisconsin. Thus you owe Wisconsin 60%*$5918 or $3551.
My employer withheld taxes for a state where I don’t live or work. What should I do?
Payroll withholding is a surprisingly complex issue, especially if your company has employees in multiple states. If your employer withheld taxes for a state where you didn’t live or work, don’t panic.
File an income tax return in that state, so you can get your money back. Next, you’ll need to determine where (if applicable), you need to file your taxes.
I own an MLP and my K-1 has income in other states, do I need to file?
MLPs can be great investments, but they sure are complicated. Many MLPs operate in multiple states - especially pipeline companies like Kinder Morgan. In those cases, you could have a tax liability in multiple states.
Once again, there is no clear cut answer if you need to file - it depends. Practically speaking, you may not owe any taxes, but some states require returns even if you owe no tax. It's important to know the requirements of each state. The great thing is the MLP Association maintains a database of state tax laws regarding this, so you can check their website and see if you need file a return.
If you end up owing a lot in taxes, and don't know what your alternatives are, it may make sense to consult a tax professional.
Do you have any other income tax questions?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.