The only two certainties in life are death and taxes, and when you go to file your taxes, you may start to prefer the former. Even if you thought you had this income tax thing down, it’s possible that COVID has changed your tax picture.
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The only two certainties in life are death and taxes, and when you go to file your taxes, you may start to prefer the former. Even if you thought you had this income tax thing down, it’s possible that COVID has changed your tax picture.
Maybe you moved to a more rural area where COVID wasn’t spreading as fast. Maybe you got laid off and had to find a new job. Perhaps you’re couch surfing with a relative to save money. Whatever the reason you do it, your taxes can get complicated if you live in one state and work in another.
We’ll be honest: This is a tax scenario with a lot of ifs and buts, and it can be tough to wrap your brain around all the rules. Don’t worry though — we’re here to help you through it. Let’s jump right in.
Do You Pay Taxes Where You Live or Where you Work?
The short answer is: it depends. First, the good news. Congress passed a law in 2015 that forbids double taxation. This means that if you live in one state and work in another, only one state can tax you. You may still have to pay income tax to more than one state, but you can’t be taxed twice on the same money. You won’t need to worry about paying income tax in multiple states, even if you have to file more than one return.
When you live in one state and work in another, the state where you work usually gets to tax you and will withhold the appropriate amount from your paycheck each week. In this situation, you will have to pay out of state taxes.
At the end of the year, you will file two returns. You’ll file a nonresident state return in the state you worked. On it, list only the income you earned in that state and only the tax you paid to that state.
You’ll then file a resident state return in the state where you live. On this return you will list all of your income, even that which you earned out of state. Don’t worry though. There is usually a place on the return where you can report and get credit for the taxes you paid to your work state.
Note that this is often the way things work – you simply pay tax in the state where you work. As always, however, things aren’t quite so simple when the tax man cometh. Things are different if the two states you’re dealing with have a reciprocal agreement, sometimes referred to as a reciprocity agreement.
How Reciprocal Agreements Work
Although it may begin to feel like it when you start asking questions at tax time, you’re not the only one who lives in one state and works in another. Some states have planned for this and created reciprocity agreements to make your life easier. Through these agreements, you can live in one state and work in a neighboring state without paying taxes there. Instead of paying taxes where you work, you will pay taxes in your resident state, which is the state where you live.
Pennsylvania and New Jersey, for example, have such an agreement. If you live in Pennsylvania but work in New Jersey, you pay your tax to Pennsylvania where you live. New Jersey will not withhold any state money from your paycheck. They will of course continue to withhold federal taxes as required.
Seventeen different states have these types of agreements in place, so it’s worth asking your employer if one applies to your situation. Your company’s payroll department should absolutely know about any applicable reciprocity agreements. If they don’t, your state’s Department of Revenue office will.
Note that in order to take advantage of these agreements, you must file an exemption form. In our example, you would file an exemption form in New Jersey so that your employer there doesn’t withhold state taxes from your income earned. You would simply pay the tax yourself to the state you live in. In this case, remember that most taxes are “pay as you go” taxes. You may have to make estimated tax payments to your state of residence throughout the year if no employer is withholding them for you.
Don’t panic if your employer makes a mistake. Let’s say you start your new job in New Jersey and file a tax exemption form because you live in Pennsylvania. Somebody made a mistake, however, and the payroll department didn’t get the memo. When you get your paycheck, you see that your employer withheld New Jersey income tax from your check even though they weren’t supposed to.
There are two ways to fix this issue, and neither is complicated. You can ask the payroll department to correct the error and refund you the money. If no one in payroll can figure out how to make the computer do that, you can simply wait until the end of the year. At tax time, you’ll file a Pennsylvania tax return and pay what you owe. You’ll also file a nonresident state tax return in New Jersey requesting a refund of the taxes you erroneously paid.
How Long Do You Have to Live in a State to File Taxes?
Continuing with our Pennsylvania and New Jersey example, let’s again pretend that you live in Pennsylvania and work in New Jersey. There is a public transportation system that runs buses between the two states, but they’ve really cut back their service during COVID. To combat this, you go and stay with your cousin in New Jersey temporarily to be closer to work.
Because you live in Pennsylvania, and because of the reciprocity agreement, you usually don’t pay tax to New Jersey. But how long can you live there before New Jersey wants your tax money instead of seeing it go to Pennsylvania?
Although it can vary by state, it’s common for a state to want taxes from you if you’ve stayed there for more than half the year, or for 183 days. These days don’t necessarily need to be consecutive. You can bounce back and forth between one state and another, but once you’ve been around for more than 6 months most states want their cut of your money. Other states use different criteria to decide when to tax you.
Some allow you to work in the state anywhere from 2 to 60 days before they start withholding tax. Others will start taxing you after you earn a certain dollar amount. Some use both criteria. In Georgia, for example, you must have state taxes withheld from your pay after you’ve worked more than 23 days, earned more than $5,000 or earned 5 percent or more of your income for the year in Georgia.
Note that these rules dictate when a state starts withholding taxes from your paycheck — not necessarily when you owe them tax. If you work in Georgia for 25 days, for example, they may start withholding state taxes from your pay. If you then stop working in Georgia after day 25, they may not get to keep the money. In that case, you would simply file a return asking for a refund.
How to File Taxes if You Lived in Two States
If you’ve moved your permanent address from one state to another during the tax year, take heart. The tax situation isn’t all that complicated if you keep good records. Write down the exact date of your move and tuck the information in a safe place until tax time.
At the end of the year, you’ll have to file taxes in both your old and new state as a part-year resident. States make it very easy to do this. Most have a line on the return where you can mark whether you were a full or part-year resident. If you specify that you were a part-year resident, you will have to list which dates you lived where and pro-rate your income.
If you deal with states that all enjoy reciprocity agreements, nothing will change but your address. Let’s say you work in Maryland but live in West Virginia. Thanks to reciprocal agreements, you would pay your taxes to West Virginia where you live.
Now let’s say you move to Pennsylvania but keep your job in Maryland. Because Pennsylvania and Maryland also have a reciprocity agreement, you would now pay your tax to Pennsylvania. If you moved halfway through the year, you’ll pay 6 months’ worth of tax to West Virginia and 6 months to Pennsylvania.
Now let’s go back to our original example. If you live in Pennsylvania and work in New Jersey, you pay tax where you live because the two states have a reciprocity agreement. Six months into the year, you decide to move to New York. New York and New Jersey do not have an agreement. In this case, you would pay the first 6 months of tax to Pennsylvania where you lived and the last 6 months to New Jersey where you worked.
How Can I Avoid Paying Duplicate Taxes if I am Required to File in More Than One State?
If you need to file a return in more than one state, your first step is to determine who you owe the tax to. Once you know who you owe, you can properly file your returns and know who to pay and who to ask for a refund.
Your W-2 and other end of the year statements will clearly outline who you paid taxes to. If you paid someone you shouldn’t have, simply file a return in that state requesting a refund. If you didn’t pay a state where you do owe, calculate the amount of tax due and file a return with a payment.
Remember that although all this tax stuff may be new to you, the state tax offices deal with these issues every day. They know what states they enjoy reciprocity agreements with and they understand the tax laws. If you live in Pennsylvania but work in New Jersey and New Jersey accidentally withheld tax from you, the tax office in New Jersey won’t be surprised when you file a nonresident return and ask for a refund.
Can I Still File Jointly if My Spouse Worked in a Different State Than I Did?
If you and your spouse worked in different states, you can still file your returns jointly. Report only your income in the state where you worked and report only your spouse’s income in the state where they worked. On your resident return for the state you live, you will list both of your incomes. If either of you is due credit for taxes paid in another state, it will appear on your resident return. If either of you owe tax to your resident state, it will also get calculated here.
There is no harm in filing separate state tax returns if it makes you feel better, but doing so isn’t necessary. Be aware that although it’s legal to file jointly on your federal return but separately on your state returns, many tax preparation software programs get confused by this. There are often workarounds that you can use to get the job done, but the process may prove arduous and time-consuming. You may need to read several help and FAQ files to learn how to do this since every program is different.
Get Professional Advice
If you’ve got it now and can count yourself as a tax guru when it comes to living and working in separate states, that’s fantastic. If you’re still confused, we understand. Like many tax topics, this one is complicated and your situation may have caveats that we didn’t cover here.
At Picnic, our network of CPA’s understands that you just can’t take a one-size-fits-all approach to taxes. We’re here to help you navigate your personal tax questions based on your unique situation and we’re happy to help. Don’t hesitate to reach out to us. We can help you make sure you pay what you owe and get back what you don’t.
