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 an individual to live in one state but be employed in another, and any taxpayers do some work or earn extra money in a location where they don't reside.

You might have to file a nonresident state 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. Yes, this sounds ominous, but some states offer exemptions from the rule, and the federal government won't let you be taxed on the same income twice.

Tax Requirements in Reciprocal States

Certain states have agreements that allow residents of other states to work there without filing nonresident tax returns. This is most common with neighboring states where crossing over the line to go to work is a common practice. These agreements are known as reciprocal agreements. 

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 a reciprocal agreement in place. But these agreements typically cover only earned income which you collect from actual employment. Other types of income would still require filing a return.

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

Sixteen states and the District of Columbia have reciprocal agreements with one or more other states as of 2019: Arizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin. These are work states, not resident states.

New Jersey had an agreement with Pennsylvania for nearly 40 years before reciprocity ended on December 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 so you can be sure of your tax filing obligations there. Your employer's human resources department should be able help you as well.

Will You Pay Taxes Twice?

You won't have to pay state taxes twice even if you work in a state that does not have reciprocity with any others. The U.S. Supreme Court ruled in May 2015 in Comptroller of the Treasury of Maryland v. Wynne et ux that two states cannot legally tax the same income.

The decision didn't come lightly because it will cost some states a great deal of tax revenue. 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 and other sources of income that were taxed elsewhere. 

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.

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.

The provisions of a reciprocal agreement don't happen automatically. You must file a state-specific form with 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 failed to do this.

You'll also still have to file a nonresident state return even after the 2015 federal court ruling, but states are now mandated by that decision to include some mechanism in their tax codes to prevent the same income from being taxed twice.

You must file a nonresident return if your employer withheld state taxes for the wrong state and you want a refund from that state, or if you made any non-employment income in a state other than your home state. 

Non-Employment Income That's Taxable to Nonresidents

Most states tax any income that is sourced to their state, including the income of nonresidents, so you don’t have to actually work in a state to owe taxes there.

These other types of income can also be taxable to a nonresident:

  • Your 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 are 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 there must file a non-resident return. 
  • 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: For example, you'd have to file a non-resident return there if you worked as a consultant or contractor in another state.