Tax Tips for Filing in Multiple States

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Most Americans don’t have to worry about filing taxes in two or more states. But, if you’re not aware that this is even a possibility, you might get tripped up one year when a state hits you with late fees and penalties for not paying what you owe.

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Even if you’re aware that multiple-state taxation is possible, the details of understanding what you owe and how to file can get a bit complicated. Although you should always consult a tax advisor if you find yourself in this situation, here’s a quick look at the basics you’ll need to know if you have to file taxes in two or more states.

Also check out seven secrets from tax preparers to help reduce your tax bill.

Reasons You Might Have To File in Multiple States

The general rule is that you’ll have to file a tax return in any state where you receive any type of income. For example, if you move from one state to another, you’ll likely earn income in one state during the first part of the year and in a second state during the remainder of the year. This could necessitate the filing of two state tax returns.

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The same is true if you travel for work and earn money in another state before returning to your home income base.

One example which can get a bit confusing is if you commute across state lines to your job before coming home in the evening. You might owe taxes only in your nonresident state, but you still might have to file a return in your home state. This is a scenario in which you’ll definitely want to consult with a tax expert.

Some taxpayers earn all of their primary income in their home state but also have income-generating properties in other states. Even if they never (or rarely) leave their state of residence, they’ll still have to file tax returns in whichever states they earn income, even if it is investment income. 

Which Type of Return Do You Have To File?

Typically, you’ll file a resident tax return in your state of residence and a nonresident return in any state where you earn income. Each state has rules for defining who is a resident and who is not, so you’ll have to check.

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One of the most common requirements is residency of at least 183 days per year. However, this can vary significantly from state to state.

Note that certain legal agreements can eliminate the need to file nonresident tax returns, even if you earn income away from your state of residence. This is because the federal government won’t allow your money to be taxed by more than one state.

Recognizing the burden that taxpayers must face when filing multiple state returns, a number of states have created reciprocity agreements to reduce these filing requirements. If you earn money in a state that has a reciprocity agreement with your home state, you won’t have to file taxes in the second state — you’ll simply pay your home state. You also won’t have to worry about the second state withholding money for taxes from your paycheck.

Even with these agreements in place, however, you might have to take the step of withholding extra money from your paycheck in your state of residence, or even make quarterly estimated payments. 

How Should You File Multiple State Tax Returns? 

If you’re filing tax returns in multiple states, you should always complete your nonresident tax return first. This way, you can determine the tax liability you have in your nonresident state. This number is important because when you later complete your resident tax return, you’ll usually be able to claim a credit for payments made in the nonresident state. If you don’t calculate this number first, you won’t know how much to claim back from your state of residence.

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Bear in mind, however, that not all states have reciprocity laws, and you might actually have to pay taxes in both states. To ensure your compliance, consult with your tax advisor and/or state taxing authorities.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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