Do I Need to File a Nonresident State Tax Return?

Filing a Nonresident Tax Return

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It's more common than you might think for someone to live in one state while being employed in another. You might have to file a nonresident tax return if you've earned money in a state where you don't live, in addition to a tax return with your home state. But some states offer exceptions from this rule, and the federal government won't let you be taxed on the same income twice.

Tax Arrangements Between "Reciprocal States"

Some states have agreements in place, known as reciprocity agreements, that allow residents of other states to work there without filing nonresident state tax returns. This is most common among neighboring states where crossing over the line to go to work is a common practice among residents.

You probably won't have to file a return in the nonresident state if your resident state and the state in which you're working have reciprocity. But these agreements typically cover only earned income—what you collect from actual employment. Reporting and paying taxes on unearned income would still require filing a return.

You'll still want to file a return in your work state to get the money refunded if your employer mistakenly withheld taxes from your pay despite a reciprocal agreement being in place.

Earned income includes wages, salaries, commissions, bonuses, tips—basically anything you receive in exchange for services you provide as an employee.

States With Reciprocity Agreements

As of 2019, 16 states and the District of Columbia have reciprocity with one or more other states. These are work states, not residence states:

  • Arizona
  • District of Columbia
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Michigan
  • Minnesota
  • Montana
  • New Jersey
  • North Dakota
  • Ohio
  • Pennsylvania
  • Virginia
  • West Virginia
  • Wisconsin

New Jersey had an agreement with Pennsylvania for nearly 40 years before reciprocity ended on Dec. 31, 2016, but the agreement between these states has since been reinstated.

These agreements can and do change periodically, so check with the state tax authority in your nonresident state to be sure of your tax filing obligations there. Your employer's human resources department should be able help you as well.

States With No Income Tax

Nine states don't impose any income tax on earned income as of 2019, so an employer located in one of them would not withhold taxes for that state if you work there. These states are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire (taxes only investment income, not earned income)
  • South Dakota
  • Tennessee (taxes only investment income, not earned income)
  • Texas
  • Washington
  • Wyoming

You do have to report this income on your home state return and federal tax return, however.

Will You Pay Taxes Twice?

You generally won't have to pay state taxes twice on the same income even if you work in a state that doesn't have reciprocity with your home state. In May 2015, the U.S. Supreme Court ruled in Comptroller of the Treasury of Maryland v. Wynne et ux. that states cannot legally tax the income of residents earned out of state if they impose a tax on nonresident earnings in the state.

The change will cost some states a great deal of tax revenue, and the decision didn't come lightly. Justices debated and listened to oral arguments for over six months before they ultimately and narrowly voted 5-4 that states must exempt from taxation earnings that were taxed elsewhere if the way taxes are structured would penalize interstate commerce. 

You'll still have to file a nonresident return in your work state if there's no reciprocity, but no tax will be due under this landmark decision. Your home state should offer you a tax credit or some other form of adjustment for any taxes you pay to other states. The 2015 Supreme Court ruling mandates that states must include some mechanism in their tax codes that would generally prevent the same income from being taxed twice in states that tax the income of residents not earned within the state and the income of nonresidents earned in the state.

When You Must File a Nonresident Return

You must file a nonresident return if you worked or earned income in a state where you're not a resident and that state does not have reciprocity with your own state. You would also have to file a return if you didn't file the necessary paperwork with your employer.

The provisions of a reciprocity agreement don't happen automatically. You must submit a state-specific form to your employer to ensure that taxes for your work state aren't withheld from your pay there. You'll have to file a nonresident return if you fail to do so.

Make sure that your employer does withhold taxes for the state where you live. Otherwise, you could be in for an ugly surprise come tax time. You could end up owing your state a fair bit of money when those taxes come due.

Taxable Non-Employment Income

You don’t have to actually work in a state to owe taxes there because most states tax all types of income that are sourced to them. Other types of income that can be taxable to a nonresident include:

  • Income as a partner in an LLC, partnership, or S-corporation: Your share as a partner can be taxable in the state where the company is based. Note that this does not apply if you're simply an employee of the company.
  • Income from services performed within the state: For example, an appliance repair person who travels across state lines to repair an oven in someone’s home must file a non-resident return in the oven-owner's state if they were self-employed.
  • Lottery or gambling winnings: These are taxable in the state where you won, so you'd have to file a return there. 
  • Income from the sale of property: This requires a nonresident tax return when the property is located somewhere other than your home state, as does rental income. 
  • Carrying on a business, trade, profession, or occupation in a state: You'd have to file a non-resident return if you worked as a consultant or contractor in another state.

If you maintain a bank account in a state where you don't live and it earns interest, you do not have to pay taxes on the interest income to that state. You do have to claim it and pay taxes on it on your federal and home state tax returns, however.

Article Sources

  1. H&R Block. "What Do I Need to Know About Filing Taxes in Two States?" Accessed April 22, 2020.

  2. Northwestern Mutual. "How to Do Taxes if You Live and Work in 2 Different States." Accessed April 22, 2020.

  3. New Jersey Division of Taxation. "NJ Income Tax – PA/NJ Reciprocal Income Tax Agreement." Accessed April 22, 2020.

  4. Thomson Reuters. "State-by-State Reciprocity Agreements." Accessed April 22, 2020.

  5. Pennsylvania Department of Revenue. "PA-NJ Tax Agreement." Accessed April 22, 2020.

  6. H&R Block. "Which States Have No Income Tax?" Accessed April 22, 2020.

  7. Harvard Law Review. "Comptroller of the Treasury of Maryland v. Wynne." Accessed April 22, 2020.

  8. Virginia Department of Taxation. "Reciprocity." Accessed April 22, 2020.

  9. Bradley Arant Boult Cummings LLP. "State Taxation of Partnerships and LLCs and Their Members," Page 8. Accessed April 22, 2020.

  10. American Payroll Association. "Multi-State Taxation." Accessed April 22, 2020.

  11. Michigan Department of Treasury. "Am I Required to File a Michigan Individual Income Tax Return MI-1040 to Report Gambling/Lottery Winnings Received From a Michigan Lottery, Casino or Horse Track if I Am a Resident of a Reciprocal State?" Accessed April 22, 2020.

  12. Georgia Department of Revenue. "A Tax Guide for Georgia Citizens," Page 8. Accessed April 22, 2020.

  13. Pennsylvania Department of Revenue. "Instructions for Nonresidents and Part-Year Residents." Accessed April 22, 2020.

  14. IRS. "Topic No. 403 Interest Received." Accessed April 22, 2020.