Filing a Nonresident State Tax Return

Two states cannot tax you on the same income

Tax forms on computer with paper forms

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If you live in one state but work in another, it's possible that you'll not only have to file a tax return where you live but also in the state where you work. This might be the case even if you didn't actually work in the other state for wages but you otherwise received some type of income there. 

If so, don't panic. It might be time-consuming to file multiple returns, but it's not particularly difficult or challenging. And you won't pay taxes twice because the U.S. Supreme Court has your back. 

How to Get Started

First, you’ll have to figure out how much income you made in the nonresident state and how much income you earned in your home state. Most nonresident returns will use the figures from your federal return, so it will make things much easier if you complete your federal return first.

Allocating Deductions and Income

In most states, you'll list your total income from your federal return in one column and your income as a nonresident in another column. Calculate the percentage of your nonresident income to total income from the totals of those two columns. We'll call this your "nonresident percentage." Depending on what state you're in, you'll use this percentage to allocate either your taxable income, your deductions, or your tax liability.

Allocating Taxable Income

Some states will have you calculate your taxable income in that state as if you were a resident even if you only worked there but didn't live there. You would then multiply this by your "nonresident percentage" to come up with your taxable income as a nonresident. Virginia is an example of a state that uses this method. 

Allocating Deductions

Other states will have you multiply this "nonresident percentage" by your federal deductions. This amount will be your nonresident deduction amount which you will then subtract from the income you made in that state as a nonresident. Maryland uses this method.

Keep in mind that certain federal deductions, such as the deduction for state and local taxes, are not deductible for state tax purposes. You'll have to adjust for these differences on your return, but you'll also be able to add any state-specific tax deductions as well.

Allocating Tax Liability

Some states, such as Delaware, allow you to offset your nonresident income by your federal itemized deductions after adjusting for non-deductible items such as state and local taxes. These returns then have you multiply your actual tax liability by your "nonresident percentage" to come up with your tax liability as a nonresident. 

If You Moved During the Year

You'll most likely have to file a part-year return instead of a nonresident return if you moved to another state during the year and this is the reason why you have income from two states. Many states have a separate tax form for part-year filers, but in others, you'll simply check a box on the regular resident return indicating that you did not live in the state for the entire year. If your state does offer a part-year return, it should be noted with "PY" on the state's website where tax forms are made available. You'll still have to divide your income between the states. 

Filing the Return in Your Resident State

You’ll also need to file a return in your resident state. You’ll include all your income on this return, even the income you made in the nonresident state because most states tax the income of residents regardless of its source. But you should receive a credit for taxes you paid to the nonresident state. 

Credit for Taxes Paid to Another State

The U.S. Supreme Court ruled in 2015 that two states cannot tax the same income. If you pay tax to Pennsylvania on the income you earned there but New Jersey is your home state, New Jersey can't tax you that same income also. Maryland was hit particularly hard by this decision, as were a handful of other states that had historically collected income tax from residents who worked elsewhere.

States are now required to provide tax credits for taxes paid to other states or jurisdictions. You can subtract this amount from your overall taxable income. Be sure to take this credit on the return you file in your home state

Filing a Return for Mistaken Withholdings

If you're filing a nonresident return because taxes were withheld for the state by mistake and you did not earn any income in the state, you can simply report zero income for that state on your nonresident return. This results in zero tax liability. You'll have a refund balance when you enter the amount mistakenly withheld from your paycheck for the nonresident state.