The U.S. Supreme Court issued a decision in Comptroller of the Treasury of Maryland v. Wynne in 2015, ruling that two states cannot tax the same taxpayer on the same income. This decision is subject to a good many rules, however, and it doesn't spare you from having to file multiple state tax returns in some cases.
You might have to file multiple state returns if you lived or worked in separate states during the tax year, but your home state should give you a tax credit on your resident return for taxes you pay to another state due to the Supreme Court decision.
Sixteen states and the District of Columbia additionally have agreements in place between them that will let you avoid filing more than one state tax return if you live and work in these jurisdictions.
You might have to file a part-year resident return or a nonresident return in a state other than the one in which you live, but this doesn't mean you'll be taxed on the same income twice.
Commuting to Another State to Work
You would have to file a resident tax return in your home state and a nonresident tax return in your work state if you commute to another state to work. All your income from all sources goes on your resident tax return, even the income you earned in your "work" state, but you would only include the wages you earned in your work state on your nonresident state tax return.
Pursuant to the Wynne decision, many states provide tax credits on resident returns for taxes you pay to other jurisdictions. The taxes you pay to your work state are effectively subtracted from any taxes you owe to your home state so you won't take a double tax hit.
Some States Have Agreements
Some states recognize the extra tax headache it can create for working families who live in one state but work in another, so they've created "reciprocal" or "reciprocity" agreements with each other.
This typically happens with neighboring states when residents in one state routinely cross over the border to find work in another, often a more metropolitan and better-paying area. For example, many Camden County, New Jersey residents hold jobs across the river in Philadelphia.
Reciprocal agreements allow you to work in a neighboring state tax-free. Your employer in your work state won't withhold taxes from your pay earned there if they have this type of agreement with your home state.
You must file an exemption form with your employer to take advantage of a reciprocity agreement. Each state has its own form, so check with your employer or your state's website to make sure you get the correct one.
States with Tax Reciprocity
Sixteen states and the District of Columbia have reciprocity agreements with other jurisdictions as of 2020. They include:
- New Jersey
- North Dakota
- West Virginia
New Jersey Governor Chris Christie repealed his state's agreement with Pennsylvania in 2017, but it was later reinstated. These two states still have reciprocity as of 2020.
If You Work for an Out-of-State Employer
A common myth about state taxes is that you have to pay them to the state where your employer is located. Even apart from the Wynne decision, that's not so. You might live and work in Idaho for a company that's based in California, but you would not have to file a California tax return in this scenario.
The location of your employer's corporate headquarters or home base generally has no bearing on your state income taxes.
Taxation depends on the physical location where you report to work. It doesn't matter if your employer's business is headquartered elsewhere, as long as you don't commute to that location to work.
Nonresidents who don't physically live or work in a state can create a state income tax liability there in a few ways, but simply working for an out-of-state company isn't one of them. Having to file a state tax return generally results from being paid for work you personally did on that state's soil.
You might also have to file a non-resident return if you own rental property in another state because you're collecting money for property you hold there.
If You Lived in Two States
You’ll have to file two part-year state tax returns if you moved across state lines during the tax year. One return will go to your former state, and one will go to your new state. You'd generally divide your income and deductions between the two returns in this case, but some states require that you report your entire income on their returns, even if you resided there for less than the full year.
This process can vary considerably by state. Check each state's tax return for an apportionment schedule to find out how you should go about it. The schedule should explain how to divide up your income depending on that's state's rules—if you can divide it at all.
You might want to ask your employer's human resources department for guidance, or touch base with a local tax professional if you lived in two separate states during the tax year.
Spouses Who Work in Different States
A big problem for military families in the past was having residency in more than one state. Members of the military are exempt from state residency and taxes in states where they're stationed, but their spouses weren't necessarily exempt prior to 2009. This meant that each spouse would have a different state of residency and they would owe taxes to both states.
The Military Spouse Residency Relief Act was passed in 2009, and this legislation has largely eliminated the problem of dual taxation for servicemembers and their spouses.
Other spouses who have just married, who are separated, or who commute to different states to work could find themselves in a situation where they owe taxes to more than one state. You can still file your state tax returns jointly if you're married and you find that you need to file in more than one state, but most states require that you include both your and your spouse's income on their return.
The General Rules
- File a nonresident state tax return if you live in one state but perform work in another and taxes were withheld from your pay.
- Your home state should offer you a tax credit for taxes you must pay to another state.
- Find out if your states have reciprocity agreements if you live in one and work in another.
- You might have to apportion your income and deductions if you move during the tax year because this would mean you actually have two resident states.