Do You Pay State Income Taxes Based on Where You Lived or Where Your Income Was Earned?

By: Amanda McMullen | Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance | Updated February 05, 2019

When you work in one state and live in another, income taxes can become confusing. Although you must typically pay income tax to your state of residence even if you earn your income outside the state, you may also owe income tax to the state in which you are employed.

Tip

You'll pay state income tax in both the state you work and the state you live, provided both states have an income tax. However, there are reciprocity agreements and credits that could help offset the duplicate taxation.

Your State of Residence and Taxes

State income tax is usually based on your state of residence. If your state of residence imposes an income tax, you must typically report all income you earned during the year and pay tax at the appropriate rate, regardless of where you earned the money.

In states that don't impose income tax, you won't need to report your out-of-state income. Currently, states with no income tax include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee have no state income tax, although dividends and investment income are taxed in those two states. A multi-state income tax calculator can help you determine how much tax you'll pay in each state.

Still, that doesn't answer the question, "If i live in one state and work in another where do i pay taxes?" If you cross state lines every day for work, things can get a little more complicated.

State of Employment

In most cases, if the state in which you earned your income collects income tax, you must file a return. If your state of employment collects income tax, you must file regardless of whether you pay tax in your home state. If both states collect income tax, you may pay taxes on the same income twice.

However, many states offer tax credits to individuals who have already paid income tax to another state. State income tax is based on collecting funds on the money you earn, but it wouldn't be fair to force you to pay full state income tax in both states.

Defining Reciprocal States

If your home state has a reciprocal agreement with the state in which you work, you may be able to file a single return in your home state. Under a reciprocal agreement, you can request an exemption from withholding for the wages you earn out-of-state, and your employer will no longer send taxes to the state in which you work. State income tax is based on the assumption that everyone pays to one state, so accommodations are often made for those who fall outside of the norm.

In some cases, the employer may even be able to pay withheld taxes to your state of residence to make tax preparation simpler. A multi-state income tax calculator can help you determine how much you owe.

Other Critical Considerations

Once you've gotten an answer to, "If i live in one state and work in another where do i pay taxes?" you'll need to take action. Even if you don't owe any additional tax in the state where you work, it may still be wise to file a return. Some states allow non-resident workers to reclaim withheld tax by filing a non-resident tax return. It may help to ask your employer or HR representative, "If i live in one state and work in another where do i pay taxes?"

If you request a withholding exemption from the state where you work and your employer is unable to send taxes to your state of residence, you should make quarterly estimated tax payments to reduce your liability at the end of the year. Use a multi-state income tax calculator to determine your tax liability in advance.

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About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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