If you lived and were employed in the same state during the previous year, the tax filing process is relatively simple.
But what if you lived in two separate states or worked in multiple states? Each state is eager to receive its portion of your earnings, which may result in you being liable for taxes in several states.
Fortunately, living or working in more than one state has no bearing on your federal tax return, but you will need to file multiple state tax returns.
In this article, we will go over the process for filing taxes if you lived in two different states and how to file taxes if you were employed in two separate states.
Key Takeaways:
Filing taxes in multiple states can be complicated and time-consuming, and taxpayers must follow different rules and filing requirements for each state where they earn income.
Taxpayers who work as independent contractors in multiple states must carefully apportion their income and allocate expenses and deductions across the different states where they have worked.
Remote workers may need to file a non-resident state tax return for the state where they worked for more than 30 days in a year.
Conducting Business in Other States
As an independent contractor operating in multiple states, you may be required to pay state income taxes in the states where you work.
The more states you do business in, the more complicated and time-consuming filing state tax returns can be, so you should take the time to familiarize yourself with the tax rules and filing requirements for each state in which you operate.
You may also need to file non-resident state tax returns in each state where you earned income. This increase in the number of tax forms you need to complete and submit can make the tax filing process more time-consuming.
You must accurately apportion your income across the different states where you have earned it through careful record-keeping and calculations to ensure the correct amount of income is reported to each state.
The expenses and deductions related to your business operations may also need to be allocated across multiple states. You'll likely have to do additional record-keeping and calculations to ensure that you are accurately claiming expenses and deductions in each state.
In such cases, seeking assistance from a tax preparation expert is a good idea.
Owning Rental Property in Another State
Owning income-producing properties, like vacation homes or rental properties in a different state, may require you to file a separate tax return in that state.
As a property owner, you must report the rental income you receive from your out-of-state property on your federal tax return. You will likely need to report this income on a non-resident state tax return as well for the state where the property is located.
You can typically deduct expenses associated with your rental property, such as mortgage interest, property taxes, insurance, maintenance, and repairs, on your federal tax return by following these steps:
Schedule E: You should report your rental income and expenses on Schedule E, Supplemental Income and Loss, filed along with your Form 1040 or 1040-SR. This allows you to itemize your income and expenses related to your rental property.
Reporting rental income: Report the rental income you received during the tax year on Schedule E, including any advance rent payments and security deposits used to cover rent.
Deducting rental expenses: On Schedule E, you can deduct mortgage interest, property taxes, insurance, maintenance, repairs, management fees, advertising, and other renting-related costs.
Depreciation also allows you to recover the cost of your investment in the property over time.
To calculate depreciation, you need to know the property's basis (usually the cost of the property), the recovery period for the property (typically 27.5 years for residential rental property), and the depreciation method (most commonly the Modified Accelerated Cost Recovery System, or MACRS).
When it comes to deducting expenses on your non-resident state tax return, the rules may differ from federal tax laws. Some possible differences can include:
State-specific limits: Some states may have limitations on the amount or types of expenses that can be deducted. For example, a state might cap the amount of property tax or mortgage interest that can be deducted or exclude certain expenses from being deductible.
Apportionment of expenses: In some cases, states may require you to apportion expenses between the federal and state levels based on the percentage of rental income earned in each jurisdiction. This can impact the amount of expenses you can deduct on your non-resident state tax return.
Moving to a New State
If you lived in one state and moved to another during the same year, you might have to file taxes in both states.
Factors like whether both states withheld income taxes from your paycheck, your work duration in each state, and your residency period in each state will determine this.
How to File Taxes Living in Multiple States
Knowing why you may have to file taxes in multiple states is one battle, but understanding how to file taxes if you lived in two states is another.
Each state has unique requirements for collecting taxes, but most states follow a relatively similar procedure of having part-year residents complete a part-year state tax return.
When filing your part-year tax return for each state you lived in, you'll need to divide your income and deductions between the states. You can check your state's tax laws to determine how to report your income.
Related: What Is a Family Operating System®?
How to File Taxes Working in Multiple States
When starting a new job, you'll be required to file a W-4 Form to withhold a portion of your paycheck for federal tax purposes.
States that collect income tax will have their own version of Form W-4 to withhold state taxes. If you worked in two different states, you'd likely need to file a non-resident tax return to pay state taxes in the non-resident state.
Check if the state you're living in has a reciprocal agreement with the state you're working in.
If it does, you won't have to pay taxes in the state where you work. Instead, you will pay all taxes in your home state. Make sure to submit an exemption form with your employer so they know to withhold taxes accordingly.
If there is no reciprocity agreement between the states, you'll file taxes according to each state's reporting requirements. You won't be taxed twice; instead, you will receive a tax credit from your residence state for the taxes you paid in the state where you worked.
Examples
Here are some hypothetical cases where you may have to file taxes in multiple states:
Living in Vermont but working in Massachusetts – File as a resident of Vermont and a non-resident of Massachusetts.
Living in Oklahoma and inheriting a family farm in Kansas – File as a resident of Oklahoma and a non-resident of Kansas until the property is sold.
Living in Michigan and working remotely for a tech startup in California – File as a resident of Michigan only. Taxes are determined based on where the work was completed, which in this case, was Michigan, regardless of the company's headquarters location.
What Are State Tax Reciprocity Agreements?
State tax reciprocity agreements allow workers to pay taxes only in the state where they live, not the state where they work. These agreements simplify withholding for employers who only need to withhold state and local taxes in the state where the employee lives.
Federal law prevents multiple states from charging state tax on the same income. However, employees who work in states without reciprocity agreements are still required to file state income tax returns in both (or multiple) states.
For example, if you moved on June 30, your income through that date would be reported on the tax return you file for the state you used to live in, while your income after that date would be taxed by your current state of residence. Interest or dividend income paid during the year should be divided according to the number of days spent in each location.
In cases where you must report all your income for the year to the state where you are a resident at the end of the year and to your old state as well, you can claim a tax credit for tax paid to your old state on the same income on the tax return for your new state. This tax credit will offset the extra tax on the income you had to report to both states.
How to Pay Taxes for Remote Workers
For remote workers, you will file your taxes for the state you reside and work in, regardless of the company's location.
As long as you don't work in another state for more than 30 days out of the year, you'll only need to file taxes in the state you live in.
If you work in another state for more than 30 days in a year, you may need to file a non-resident state tax return for that state.
Example
Let's say you live in New Jersey and work remotely for a company based in California. Since you live and perform your work in New Jersey, you will file and pay taxes in New Jersey, regardless of your employer's location in California.
However, if you travel to California and work there for 40 days during the year, you may need to file a non-resident state tax return for California, as you have exceeded the 30-day threshold. In this case, you would file and pay taxes in both New Jersey and California, following each state's tax laws and regulations.
Change of Address
When moving, you should consider updating your address with the IRS and complete a USPS change of address to ensure you receive any important documents sent by the agency.
When you file your federal tax return for the first time after moving, the IRS will automatically update your address. However, if you move between tax filing periods, you can proactively notify the IRS by filing Form 8822 (Change of Address) or Form 8822-B (Change of Address or Responsible Party - Business).
To update your address with the IRS:
Download and fill out the appropriate form from the IRS website. Provide your old address, new address, and Social Security Number (for individuals) or Employer Identification Number (for businesses).
Mail the completed form to the address specified in the form's instructions.
To complete a USPS change of address:
Online: Visit the USPS Change of Address website. Fill out the required information, including your old address, new address, and move date. You will need to pay a $1.10 identity verification fee using a credit or debit card.
By phone: Call 1-800-ASK-USPS (1-800-275-8777) and request a change of address. Similar to the online process, you will be charged a $1.10 identity verification fee.
In person: Visit your local post office and ask for a change of address form (PS Form 3575). Fill out the form and hand it to a postal worker or drop it in the designated mailbox at the post office. There is no fee for submitting the form in person.
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