I work in one state and live in another state. What do I file? (Part II)

I work in one state and live in another state. What do I file?

In Part I, I touched upon the basic principles of income tax reciprocity between states using a fictitious example. In this installment, I will show how state reciprocity is handled for two states that have a reciprocal agreement.

We all know that states like to do things in their own way. It's what makes the United States so...interesting.  Reciprocal rules are no exception.  In some reciprocal states, you just mark a checkbox on your return, fill in a few lines, and you're done.  In other states, well...

Say you live in New Jersey and work in Pennsylvania, two that do have reciprocity. But every year, you end up filing a nonresident Pennsylvania return plus a resident New Jersey return. This is because you earned Pennsylvania source income (your wages) and your home state of New Jersey requires you to report all of your income regardless of where you earned it.

If these two state have reciprocity, then why do you have to keep filing a Pennsylvania nonresident return and a New Jersey return? What's going on?

First of all, Pennsylvania reciprocity rules specify that to avoid filing a nonresident return, you need to submit Form REV-420 to your Pennsylvania employer. This form requests New Jersey state withholding to be taken from your wages, not Pennsylvania withholding.  Second, your Pennsylvania employer needs to grant your request. If and only if both conditions are met, can you only have state tax withheld from New Jersey and not from Pennsylvania. (You'll see the NJ instead of a PA in Box 15 of your Form W-2).

Otherwise your employer is required by law to continue withholding Pennsylvania tax. This means that you will continue to file returns for both states. So you see that reciprocity often comes with conditions; it isn't always automatically granted.

If, you are a resident in one of the states listed below and you are also filing a nonresident return in a reciprocal state, ask your payroll department  or your resident state tax board how you can eliminate the need to file 2 state tax returns.  Usually you just need to fill out a form.  After all, reciprocity is designed to make filing easier, not harder!

Also, see our TurboTax knowledgebase article for the forms that may be required: Filing State Returns When You Live and Work in Separate States.

Here are the states (current as of March 2008) that have reciprocity agreements. The state in bold is your employer state.

• District of Columbia: Allows all nonresidents to exclude DC source income from taxation. However, only Maryland and Virginia have "true" reciprocity with DC (that is, they allow DC residents to exclude MD and VA source income from taxation.)
• Illinois:  Iowa, Kentucky, Michigan, Wisconsin
• Indiana: Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
• Iowa: Illinois
• Kentucky: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
• Maryland: District of Columbia, Pennsylvania, Virginia, West Virginia
• Michigan: Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
• Minnesota: Michigan, North Dakota, Wisconsin
• Montana: North Dakota
• New Jersey: Pennsylvania
• North Dakota: Minnesota, Montana
• Ohio: Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
• Pennsylvania: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
• Virginia: District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
• West Virginia:  Kentucky, Maryland, Ohio, Pennsylvania, Virginia
• Wisconsin: Illinois, Indiana, Kentucky, Michigan, Minnesota

Comments

[TurboTaxLee]

Hi CSKelly, Good questions. And I have more questions for you. Ah, taxes are such fun.

Are you going to move to GA when your company does? And is your intent to stay in GA (sell/rent your home in SC)? If so and you are temporarily (few months) in AL, here's a suggestion on how to file. 1) File a part-year resident return for SC (from 1/1 until you move permanently in 2008 to GA), file part-year return for GA (from the date you move there to end of year), and file an AL return as a nonresident (since you are in AL temporarily, don't plan to stay, and still have home in SC) and take an Out of state tax credit on SC return for the tax you paid to AL. Again, such fun. Hope this info is helpful!

[CSKelley]

Hold on as this might get complicated: I recently moved from South Carolina to Alabama to take a position with a company that is temporarily based in Alabama but will be permanently located in Georgia by year end. I have an apartment in Alabama but I own a home and maintain residency in SC. I worked the first part of the year in SC and paid taxes there and since I started work in Alabama, have been paying state taxes for Alabama. What do I need to do when the company moves to its permenant location in Georgia in October? Will I have to file taxes in all three states for 2008?

[Justin]

Hi,

I will am a resident and home owner of Kentucky, but will be moving to Missouri for work from September trough December. How will the state taxes work out for this? Will I pay both state taxes and get this money reimbursed after filing? Pay both without reimbursment? Pay just one state?

[TurboTaxLee]

Hi AEOJK, Another good question. First let's talk about your work in Texas until May. It sounds like you lived and worked in Texas. If you don't have a home in any other state (MO?) or worked in any other state in 2007, then Texas is your resident state for all of 2007 and lucky you, you don't have to file a state tax return. If you had a residence somewhere else, let me know and we'll continue the talk on your 2007 residence.

Now the new project. Are you keeping a home in Texas tho' you're working in PA? If you're moving to PA, working in PA, and not keeping a home in any other state, it's a good guess you will be a PA resident, paying PA tax and not MO tax. I'm assuming that your move to PA is not just for a couple of weeks (temporary). Let me know if I haven't answered your question.

[AEOJK]

I'm employed in Missouri but my project/work would be in PA starting from this May. Before May I lived and worked in TX, how should I report my tax currently? And what about my tax return for this year later on?

[TurboTaxLee]

Hi Christoph, Good question. Since you are a full-time resident of NH and do all your work in NH and not NJ, I don't think that you should have to have NJ withholding. Here's the link to the publication for employers dealing with state withholding. Check out page 5 on nonresident employee and then discuss it with your employer.

http://www.state.nj.us/treasury/taxation/pdf/other_forms/git-er/07njwt.pdf

[Christoph]

I'm employed in NJ but work 100% from my home office in NH. Are there any special regulations?Will I just continue to pay NJ taxes even though I don't live and work there? Somewhere else I heard (but could not verify) that my employer is supposed to file for some kind of tax number in NH? Thanks a lot.

[TurboTaxLee]

Good question. Since you are getting back $108 from Mississippi, you are paying tax to MS. of $$392. On your Alabama return, your Alabama taxes are being reduce by around $392 (on your out-of-state tax credit). The only way to get more back is to either increase your withholding on MS or AL.

[Keith Baker]

Throughout the year I work in Mississippi and pay in State Taxes to Mississippi, but I live in Alabama. I pay well over $500.00 to Mississippi but I only get back from Mississippi $108.00. Then I have to file in Alabama and I owe $350.00 to Alabama. How can I get by with out paying all my State taxes to Mississippi if I'm not going to get back at least enough to pay my Alabama Taxes?