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 resident 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 reciprocity agreements in place between them 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 might still require filing a return.
You'll want to file a return in your work state even if you're not required to pay taxes there to get a refund 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
Sixteen states and the District of Columbia have reciprocity with one or more other states as of 2020. These are work states, not residence states:
- District of Columbia
- New Jersey
- North Dakota
- West Virginia
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 been reinstated and is still in place as of 2020.
These agreements can and do change periodically, so check with the state tax authority in your nonresident state to be sure of your 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 any earned income at all as of 2020, so an employer located in one of them would not withhold taxes for that state if you work there. These states are:
- New Hampshire (taxes only investment income, not earned income)
- South Dakota
- Tennessee (taxes only investment income, not earned income)
You do have to report this income on your home state return and your federal tax return, however.
Will You Pay Taxes Twice?
You shouldn'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. The U.S. Supreme Court ruled in Comptroller of the Treasury of Maryland v. Wynne in 2015 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.
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.
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 paid to other states.
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 if that state doesn't have reciprocity with your own state.
You would also have to file a return there if you didn't file the necessary paperwork with your employer to exempt you from withholding. 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'd have to file a nonresident return if you fail to do so.
Make sure that your employer withholds taxes for the state where you live or 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 ultimately 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. This does not apply if you're simply an employee of the company, however.
- Income from services performed within the state: For example, a self-employed appliance repair person who travels across state lines to repair an oven in someone’s home should file a non-resident return in the oven owner's state.
- 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 earned there.
- 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.
You do not have to pay taxes on the interest income to that state if you maintain a bank account in a state where you don't live and it earns interest. You do have to claim it and pay taxes on it on your federal and home state tax returns, however.
Frequently Asked Questions (FAQs)
How do I file a nonresident state tax return?
Each state has its own procedures and requirements for filing nonresident tax return. Even if you won't ultimately owe taxes, though, you'll need to file a nonresident return to report income paid to your home state and to reconcile what you do or don't owe.
Which states have the highest income tax rates?
It's difficult to compare state income tax rates directly because some have flat tax rates that apply to everyone, while others have graduated rates that increase for higher-income taxpayers. North Carolina has the highest flat tax rate, at 5.25%, while California has the highest graduated rate for top earners, at 13.3%.
Why aren't any state income taxes being withheld from my paycheck?
When you began working, your employer should have had you fill out a state withholdings form that included any information about exemptions or credits based on your income, dependents, and more. You might be exempt from state income taxes based on your information in that form. If you think you filled it out incorrectly—or you didn't fill it out at all—ask your employer for a new one.