It's not unusual to live and work in a different state, particularly if you live in a major metro area. But it can be a pain figuring out how to deal with the tax implications of having a "home state" and a "work state."
But there's no need to panic — most likely, you’re not going to be paying twice as much in taxes, although it can get complicated. Read on for help on how to handle your taxes if you live in one state but work in another.
Where do you pay taxes when you live in one state and work in another?
The laws of the two states where you live and work will determine how you file taxes if you don't live in the state where you work.
Reciprocal tax agreements between states
Some states have reciprocal agreements, meaning you can work in a neighboring state without having to pay taxes there. If your work state has one of these agreements, you’ll need to fill out an exemption form. The following have reciprocal agreements, and links to forms or additional info regarding these individual state exemptions can be found in the links. (If your work state is not on this list, check out the next section.)
Arizona: Residents of California, Indiana, Oregon and Virginia are exempt from paying income tax on wages earned in Arizona
District of Columbia: If you don't live in D.C., you don't have to pay income tax for the district
Illinois: Residents of Iowa, Kentucky, Michigan and Wisconsin are exempt
Indiana: Residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin are exempt
Iowa: Residents of Illinois are exempt
Kentucky: Residents of Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin and Virginia are exempt
Maryland: Residents of D.C., Pennsylvania, Virginia and West Virginia are exempt
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Note: Even if you live and work in states that have a reciprocal agreement with each other, the reciprocal agreement only covers employment income. If you have non-employment income coming in from your work state, you will also have to file a nonresident tax return, despite the fact that there is a reciprocal agreement in place. (See below.) You should also consult with a properly qualified accountant or tax specialist for additional guidance on state-specific tax concerns.
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If your state doesn’t have a reciprocal agreement
If the state you work in does not have a reciprocal agreement with your home state, you’ll have to file a resident tax return and a nonresident tax return.
On your resident tax return (for your home state), you list all sources of income, including that which you earned out-of-state.
On your nonresident tax return (for your work state), you only list the income that you made in that state.
In most cases, your home state will allow you to claim a tax credit on your resident tax form for the taxes that you paid to your work state.
Non-employment income from another state
You’ll also need to file a nonresident tax return if you have non-employment income from a state that is not your home state. Non-employment income includes, but may not be limited to:
Income that comes from your role as a partner or officer in an LLC, partnership or S-corporation
Income from services that you performed within another state
Lottery or gambling winnings
Income from property sales
Income from rental properties
Income from consulting or contract work
What if I’m temporarily working from home?
The past two years have made dual-state tax situations even more confusing, as many workers were forced into remote work. In 2020, many states suspended withholding requirements temporarily because of the pandemic, but in 2021 many of those suspensions went away. And while many states will typically help you offset double taxation with tax credits, seven states have a “convenience rule” that requires you to pay taxes to your work state (without a credit) if you’re working in a different state for your own convenience and not because your employer requires it. That makes it all the more important to work with a tax professional who can help you navigate your home and work states’ laws.
This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice specific to your situation.
