The federal government requires you to report all income, calculate your total tax liability, and subtract the standard deduction (or any qualifying itemized deductions). However, most states also require you to pay additional state income taxes, which can be complicated. If you live in one state but work in another, you’ll need to fill out a nonresident state tax return.
Working in neighboring states is nothing new and familiar for residents living in regions bordering neighboring states. Thankfully, you don’t have to pay taxes twice on the same income if you live in one state but work in another. However, you must keep track of your income across state lines and fill out a nonresident state tax return to avoid owing the IRS money. How you fill out those tax returns and what you put into them depends on where you are. Let’s get into it.
What Is a Nonresident State Tax Return?
A nonresident state tax return is a unique state income tax return that nonresidents must file if they earn income in that state but are not residents. If you live in Colorado but work in New Mexico, you will need to file a nonresident state tax return in New Mexico and your tax return in Colorado. The tricky thing is that this applies to all forms of compensation. So if you aren’t working in New Mexico, you must report any income earned across state lines in a nonresident state tax return and your income tax return for your home state.
The exceptions to this rule are states with reciprocity agreements. Seventeen states currently have reciprocity agreements with certain neighboring states exempting you from filing a nonresident tax return if you’re working in one of those states and living in one of the conditional neighboring states. But not to worry – you can’t get taxed twice on the same income even if you don’t live in a state with a reciprocity agreement, thanks to a relatively recent ruling by the Supreme Court in 2015.
Meanwhile, on your home state’s income tax return, you can write off any taxes paid to the states you work in but aren’t a resident of as a tax credit. This, again, is somewhat complicated. The agreement explicitly worded that states that tax nonresidents cannot tax their residents on income earned out of state. Meaning that if your home state taxes your income – even if you made that income in a neighboring state – the neighboring state could not tax it. Meanwhile, states that taxed their residents for income earned out of state could not tax nonresidents on income earned in their state.
What this boils down to, however, is simple: You must file a nonresident income tax return if you do not live and work in states with a reciprocity agreement. If the state you work in requires you to pay those taxes, your home state must offer a tax credit. Otherwise, you might pay your home state but not need to pay in your jobs state. Depending on where you live, you will need to file a nonresident state tax return, whether you do or don’t owe any income taxes.
Do I Need to File a Nonresident State Tax Return?
The answer is maybe. It depends on where you live and where you work. So far, seventeen states have signed a reciprocity agreement that allows employees who work in their state but live in a neighboring state to get away with just one tax return based in their home state. Furthermore, nine states don’t have state income taxes (with a rule of exception in New Hampshire). The seventeen (working) states that have reciprocity agreements include:
- New Jersey
- North Dakota
- West Virginia
Remember that New Jersey temporarily ended its reciprocity agreement with Pennsylvania in 2016 and reinstated it in 2021. For any tax years, you need to file retroactively between those years; you may need to file two returns. Furthermore, the nine states that do not impose any income tax include:
- New Hampshire (still taxes investment income)
- South Dakota
In other words, working in any of these states will not require you to file an additional state income tax return. You will still need to report that income in your home state tax return; however, if your home state charges income taxes.
Where Do I Start?
Is a reciprocity agreement in place between the state you work in and your home state? Start by determining where you live and where you work. Then decide whether you’ve used that agreement by submitting a state-specific form to your employer. This is crucial to ensure that your employer properly withholds your state taxes. If you haven’t, you must file a nonresident state income tax return or risk a hefty and unexpected tax bill.
Assuming you did, you could continue filing a single state tax return for your income at home. If you did not file that form yet, or if you do not live and work in states with reciprocity agreements, you will need to acquire a nonresident tax return from the state you work in. The next step involves determining your income in that state. Figure out exactly how much you earned working in your work state. In addition to salaries and paychecks, other types of taxable income include:
- Gambling and lotto winnings.
- Income from selling property.
- Income as a partner in a corporation, LLC, or partnership.
- Compensation and income for carrying out a trade in a different state.
To make things easier on you, consider having your prepared federal tax return at hand. Many nonresident tax return templates refer to the figures calculated on your federal tax return to simplify things. Calculate the percentage of your nonresident income versus your total income. This percentage will be your nonresident percentage. You can use this percentage to determine your tax liability, state-specific tax deductions, etc. Your nonresident tax return will have a column for your total income (as per your federal return) and a total for your state-specific earnings as a nonresident.
The process differs from state to state, so it’s essential to refer to your work state’s tax authority and download the respective tax forms for an accurate estimate of your total tax liability in that state. Due to the complexity, many people opt to hire a tax professional to assist in the process. Once you’ve determined your tax liability in your work state, you can file your nonresident tax return. You will need to report all income in your home state tax return – but you are eligible for a tax credit on income already taxed in your work state, as mentioned previously.
What If I Just Moved to a New State?
If you’ve moved to your work state or simply moved from one state to another, your income is still split between two states. However, instead of using a nonresident form – if you began working in your new shape after moving there – you will need to complete a part-year return. This is another type of tax return that calculates your tax liability in your new state after a move.