Filing a Nonresident State Tax Return

Two states cannot tax you on the same income

Paper forms in front of tax forms shown on a computer
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It's possible that you'll have to file a state tax return in the state where you live as well as a nonresident tax return in the one where you work if you live in one state but work in another. 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 or compensation there. 

It might be time-consuming to file multiple returns, but it's not particularly difficult or challenging. And you won't pay taxes twice to both states, thanks to a 2015 U.S. Supreme Court decision. 

How to Get Started

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

Allocating Your Income

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

Some states, such as Ohio, make this much easier by providing specific tax forms to walk you through the calculations and the math.

Some states will have you calculate your taxable earnings in that state as if you were a resident there, 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 would then subtract from the earnings 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 you'll simply check a box on the regular resident return in others, indicating that you didn't live in the state for the entire year.

It should be noted with "PY" on the state's website where tax forms are made available if your state does offer a part-year return. 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 earnings on this return, even what you made in the nonresident state, because most states tax the income of residents regardless of its source. But you should receive a credit from your home state for any 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. New Jersey can't tax you on income you earned in Pennsylvania if you pay tax to Pennsylvania on the income you earned there. Maryland was hit particularly hard by this decision—in fact, the suit was brought by the state of Maryland—as were a handful of other states that had historically collected tax from residents who worked elsewhere.

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

Some States Have Reciprocity

Several neighboring states have entered into reciprocity agreements with each other. These agreements allow income earned in one state to be taxed in the other, eradicating the need for tax credits to compensate for these taxes. Employers would make withholdings only for tax owed to the employee's state of residence.

The following states have reciprocity with at least one other state:

  • Arizona
  • District of Columbia
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Michigan
  • Minnesota
  • Montana
  • New Jersey
  • North Dakota
  • Ohio
  • Pennsylvania
  • Virginia
  • West Virginia
  • Wisconsin

New Jersey ended its reciprocity with Pennsylvania effective January 2017, but that agreement has since been reinstated.

Filing a Return for Mistaken Withholdings

You can simply report zero income for that state on your nonresident return if you're filing a nonresident return because taxes were withheld for that state by mistake. This might be the case if your home state and your work state have reciprocity, but you neglected to officially notify your employer that you're exempt from taxation by your work state.

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. 

Article Sources

  1. Ohio Department of Taxation. "Ohio IT NRC – Income Allocation and Apportionment Nonresident Credit and Part-Year Resident Credit." Accessed May 27, 2020.

  2. Oyez.org. "Comptroller of the Treasury of Maryland v. Wynne." Accessed May 26, 2020.

  3. Urban Institute.org. "Individual Income Taxes." Accessed May 26, 2020.

  4. CPA Practice Advisor. "State-by-State Income Tax Reciprocity Agreements." Accessed May 26, 2020.

  5. Pennsylvania Department of Revenue. "PA-NJ Tax Agreement." Accessed May 26, 2020.