Do You Have To File a Nonresident State Tax Return?

Filing a Nonresident Tax Return

This animated illustration shows a car driving down a road with New Jersey plates entering into Pennsylvania, respresenting a headline that reads, "What to Know About Nonresident State Tax Returns," with text that reads, "If you reside in one state but earn income in another, you might have to file a nonresident state tax return," "You're exempt from filing a nonresident state tax return if your state has a reciprocity agreement with your work state," "As of 2020, 16 states and the District of Columbia have reciprocity with one or more states," and "If you do have to file a nonresident state tax return, you won't be taxed on the same income twice."

The Balance / Julie Bang

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, as well as 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.

Key Takeaways

  • Seventeen states and the District of Columbia have reciprocity agreements in place, so employees who work there but live in a neighboring state don't have to file nonresident tax returns in their work state.
  • Eight states have no income tax, so you won't have to file a return if you work in one of them.
  • You won't have to pay taxes on the same income twice, once to your home state and once to your work state, even if you have to file two returns. Federal law prohibits it.

Tax Agreements Between States

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

You 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 cover only earned income—what you collect from employment. Reporting and paying taxes on unearned income might still require filing a tax return.

You'll want to file a return in your work state even if you don't pay taxes there to get a refund if your employer withheld taxes from your pay despite an agreement being in place.

Earned income is any income you receive in exchange for services you provide as an employee. It includes wages, salaries, commissions, bonuses, and tips.

States With Reciprocity Agreements

Sixteen states and the District of Columbia have reciprocity with one or more other states as of 2022. 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 it ended on December 31, 2016. But the agreement between these states has since been reinstated. It's in place as of the tax year 2021, the return you'll file in 2022.

These agreements can and do change from year to year, 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 to help you as well.

States With No Income Tax

Eight states don't impose any income tax on earned income at all as of the tax year 2022. An employer located in one of them would not withhold taxes for that state if you work there. These states are:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

New Hampshire taxes only investment income, not earned income. Tennessee did the same, but even that tax was repealed effective 2021.

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

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 2015 in Comptroller of the Treasury of Maryland v. Wynne that states cannot tax the income of residents earned out of state if they impose a tax on nonresident earnings in the state.

The change 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 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 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 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 home state.

You would also have to file a return there if you didn't file the correct 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. It would be the only way you could have those taxes refunded to you.

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 work in a state to owe taxes there. 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. But this rule does not apply if you're simply an employee of the company.
  • Income from services performed within the state: A self-employed appliance repair person who travels across state lines to repair an oven in someone's home should file a nonresident 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 nonresident return if you worked as a consultant or contractor in another state.

You do not have to pay taxes on interest income to that state if you maintain a bank account in a state where you don't live and that money 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 for filing nonresident tax returns. You'll have to file a nonresident return to report income paid to your home state and to reconcile what you do or don't owe, even if you won't owe taxes.

Which states have the highest income tax rates?

It's hard to compare state income tax rates directly. 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% as of the tax year 2021, 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?

Your employer should have had you fill out a state withholdings form when you began working. It asked for information about exemptions or credits you want to claim based on your income, dependents, and more. You might be exempt from state income taxes based on your information in that form. Ask your employer for a new form if you think you filled it out incorrectly or if you didn't fill it out at all.

Article Sources

  1. Northwestern Mutual. "How to Do Taxes if You Live and Work in 2 Different States." Accessed Dec. 31, 2021.

  2. New Jersey Division of Taxation. "NJ Income Tax – PA/NJ Reciprocal Income Tax Agreement." Accessed Dec. 31, 2021.

  3. Payroll Tax Knowledge Center. "States With Reciprocal Agreements." Accessed Dec. 31, 2021.

  4. Tax Foundation. "State Individual Income Tax Rates and Brackets for 2021." Accessed Dec. 31, 2021.

  5. Harvard Law Review. "Comptroller of the Treasury of Maryland v. Wynne." Accessed Dec. 31, 2021.

  6. Virginia Department of Taxation. "Reciprocity." Accessed Dec. 31, 2021.

  7. Bradley Arant Boult Cummings LLP. "State Taxation of Partnerships and LLCs and Their Members," Page 8. Accessed Dec. 31, 2021.

  8. American Payroll Association. "Multi-State Taxation." Accessed Dec. 31, 2021.

  9. 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 Dec. 31, 2021.

  10. Georgia Department of Revenue. "A Tax Guide for Georgia Citizens," Page 8. Accessed Dec. 31, 2021.

  11. IRS. "Topic No. 403 Interest Received." Accessed Dec. 31, 2021.

  12. Tax Foundation. "State Individual Income Tax Rates and Brackets for 2021." Accessed Dec. 31, 2021.