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Paying Taxes When You Live or Work in More Than One State


Most of the financial press deals with federal taxes. After all, that’s where the mass audiences are. But don’t forget, you have state taxes to deal with, as well. This particularly affects you if you lived or worked during the year in one of the states that charges state income tax.

As of December, 2012, the following states charge individual income tax at the following rates:

  • Alabama (2 to 5 percent)
  • Arizona (2.59 to 4.54 percent)
  • Arkansas (1 to 7 percent)
  • California (1 to 10.3 percent)
  • Colorado (4.63 percent of federal taxable income)
  • Connecticut (3 to 6.7 percent)
  • Delaware (2.2 to 6.75 percent)
  • Georgia (1 to 6 percent)
  • Hawaii (1.4 to 11 percent)
  • Idaho (1.6 to 7.4 percent)
  • Iowa (0.36 to 8.98 percent)
  • Kentucky (2 to 6 percent)
  • Maine (2 to 8.5 percent)
  • Maryland (2 to 5.75 percent)
  • Massachusetts (5.3 percent)
  • Minnesota (5.35 to 7.85 percent)
  • Mississippi (3 to 5 percent)
  • Missouri (1.5 to 6 percent)
  • Montana (1 to 6.9 percent)
  • Nebraska (2.56 to 6.84 percent)
  • New Hampshire (5 percent)
  • New Jersey (1.4 percent to 8.97 percent)
  • New Mexico (1.7 percent to 4.9 percent)
  • New York (4 to 8.82 percent)
  • North Carolina (6 to 7.75 percent)
  • North Dakota (1.51 to 3.99 percent)
  • Ohio (0.587 to 5.925 percent)
  • Oklahoma (0.5 to 5.25 percent)
  • Oregon (5 to 9.9 percent)
  • Pennsylvania (3.07 percent)
  • Rhode Island (3.75 to 5.99 percent)
  • South Carolina (0 to 7 percent)
  • Tennessee (6 percent)
  • Utah (5 percent)
  • Vermont (3.55 to 8.95 percent)
  • Virginia (2 to 5.75 percent)
  • West Virginia (3 to 6.5 percent)
  • Wisconsin (4.6 to 7.5 percent)
  • District of Columbia (4 to 8.95 percent)

The following states have no individual state income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Source: The Tax Foundation

Note: Different states have different income brackets. Moreover, some states exempt a certain amount of income from taxation, while others assess income tax on the first dollar. Additionally, some states, like New Hampshire and Tennessee, only charge individual income tax on interest and dividend income. Income from wages is generally tax-free in this instance.

If you earned income in two states – for instance, you transferred from state to state during the tax year, or you live and work full time in one state and are in a Guard or Reserve unit in the other – then you will typically need to file two state individual income tax returns.

Things get a little trickier if you live in one state and work in another. But the general rule is this: You owe taxes in the state where you get paid. If you work in Florida and live in Georgia, for example, you wouldn’t have income tax due on your Florida work: Florida doesn’t have a state income tax.

Since Florida doesn’t have an individual state income tax, there are no returns to file. But let’s say you work in the District of Columbia and live in Maryland?

In this case, you should file Maryland taxes, not District of Columbia Taxes. The two entities have a tax reciprocity agreement. That means that the District of Columbia and the State of Maryland have made a deal to allow those who live in one place and work in the other to simply file taxes where they live. Generally, your employer should not be withholding taxes for the District of Columbia. But be prepared for a tax hit at the end of the year, if your employer didn’t withhold.

If you live and work in the District, you need to file a DC tax return. (If your employer is in the District of Columbia and you are not a DC resident, and your employer withheld taxes, you may need to request the District to refund your taxes. To do this, file a DC Form D-40B with the District of Columbia.

The District of Columbia would like to start hitting up those who commute from outside of the District with a commuter tax, but thus far they haven’t been able to get it through.

Not every state has a reciprocity agreement with every neighboring state, though, so check with a tax advisor licensed in your state.

If there is no reciprocity agreement, then both states are going to expect an income tax return from you. Your employer will likely have withheld income taxes from your check – and forwarded them to the state you are not resident in.

If you’re not careful, you could wind up paying taxes in both states on your full income. This is not what is supposed to happen. Instead, your state of residence should give you credit for taxes paid in another state. If your total state taxes are much higher than expected, one state return, it could be because you have not taken the credit for taxes paid in another state.

Most tax software packages can handle income from two states – but not three. They just aren’t programmed to do that. In those cases, you’re probably better off getting a tax professional to do some calculations for you.

In fact, it’s not a bad idea to retain a tax pro, regardless of your situation, since they can routinely find deductions and tax benefits for most people that they would overlook.

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