Filing state income tax returns is usually uncomplicated if you live and work in the same state during the entire calendar year, and have no income sourced from a state other than the state in which you reside. Living in one of seven states such as Florida, which has no state income tax, makes filing even easier.
However, earning out-of-state income through several scenarios would require you to file more than one state return. These could include:
- Changing residency mid-year to a new state.
- Work that has you in multiple states (consulting or professional athletes are two examples).
- Owning investment/rental property outside of your resident state.
- Owning a partnership interest in an entity with income sourced to a state other than the state in which you are domiciled.
Here are the basics of multi-state income tax filings to help you prepare for filing:
Establish your domicile
Determining if you are considered domiciled in a particular state is an important step in figuring your state tax obligations.
Your permanent home is also known as your domicile. Each state has different rules regarding the terms and conditions of what is considered a domicile. Your domicile can be different from your residence. Your residence is based upon how much time you spend in a state. The definitions of time that qualify you to be a resident, and therefore subject to taxation, also differ from state to state.
Your domicile can typically be established by looking at where you live most of the year, where you own property, where you have your bank accounts, where your kids go to school, and where are you registered to vote.
File a non-resident state tax return
If you’ve earned money in a state where you don’t live, you’ll need to file a non-resident state tax return.
Some states acknowledge the extra tax burden of out-of-state taxes, and they’ve created “reciprocal” or “reciprocity” agreements with each other. This typically happens with neighboring states where many people are likely to live and work in a different state. The reciprocity agreement allows you to work in a neighboring state tax-free. You’ll only have to pay taxes to your home state if you live and work in two states that have this type of agreement, but you must file an exemption form with your employer to avoid taxes being withheld from your pay by your work state.
That said, you must still file a nonresident return if you earned income in a state that does not have reciprocity with your own state.
You don’t have to actually work in a state to owe taxes there. Other types of income taxable to a nonresident include:
- Income as a partner in an LLC, partnership, or S-corporation
- Lottery or gambling winnings
- Income from the sale of property
- Operating a business, trade, profession, or occupation in a state
File resident state tax return
Once you’ve established in which state you file a resident state tax return, all of your income from that year will be subject to your home state’s taxes. When filing, you will be able to list the taxes owed to the other states. A tax credit is typically provided to offset the taxes paid to the other state.
Unfortunately, calculating multi-state taxation is complex. For example, income reported on your W-2 often doesn’t accurately allocate the income correctly between the states. This can result in paying state taxes on the same income twice. Or, “reverse credit” states, which flip the process, allowing the tax credit to be reported on the non-resident state’s tax liability instead.
File part-year state tax return
A part-year resident return is for those who have moved states mid-year and established residency. It allows you to split your income and be considered a resident in two different states.
Part-year tax returns are typically prepared based on your total income for all states, then your tax liability is pro-rated based on how much income you made in each state. This is easy to figure out if you moved to a new state to begin a job there because you’ll have separate W-2 forms. The filing can get more complicated if you moved while still working for the same company because you would only receive one W-2.
Ask for help
Mistakes on multi-state income tax returns can result in overpayment and possible audits. Each state has different processes, requirements, and credits, making filing substantially more complicated. Our expert team at Sousa & Weber can help you navigate your multi-state income tax responsibilities and ensure compliance across various states.
Contact Sousa & Weber for a consultation or assistance.