Two State Tax Returns: Live in One State, Work in Another

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I get a lot of questions from people about working in one state and living in another. That’s pretty common here in Saint Louis where we have lots of folks living in Illinois that come over the river to work here and vice versa. Today I’m going to talk about doing your tax return when you have two states to deal with.

First, the technical words you need to know:

The state you live in is called your resident state. There will probably be a check box or something like that in your computer program. If you live in Illinois, then your resident state is Illinois.

The state you work in (but don’t live in) is called the non-resident state. In this example, Missouri is the non-resident state.

Tax liability: This is not your refund or the amount of money that was withheld on your W2. Tax liability is a number computed when you prepare the state tax return. It will say “tax liability” on your state income tax form. This is the dollar amount the state says that you owe them for taxes before they take into account what you’ve already paid through your withholding or estimated payments.

That’s not so hard, right? Next, you need to make sure you do your tax returns in the right order:

Always do the federal return first. Make sure that it’s done and that it’s right before you start your state returns. If you finish, and then go back in to make changes to the federal, you’ll have to go back and double check everything on the state returns and that can be a pain in the back, so finish the federal first.

Next, do the non-resident state—that’s the state you work in. That one’s easiest. You only pay tax in that state for the wages you earn in that state. Usually, when preparing a non-resident state return, there will be a check box that says “non-resident” somewhere in your software. Be sure to check it. You’ll want to make note of your “tax liability” for the non-resident state. You’ll need that number for your resident state return.

After you’ve finished the non-resident state, then you can prepare your resident state return. You resident state is going to tax all of your income (including the wages you earned in the other state.) The resident state will include your wages, interest, dividends, stock trades, retirement income, and basically everything else that’s taxable.

Things to know about the resident state return:

Even though you pay tax on all of the income you earn to your resident state, you will get a credit for taxes paid to another state. For example: using our Illinois/Missouri return again—since you paid income tax to Missouri for the wages you earned while working there, Illinois will give you a credit for those taxes paid so you won’t end up having to pay twice for working in another state.

The form you need to complete will have different names depending on the state, but it will basically be called a Credit for Taxes Paid to Another State. Sometimes it will be listed as an NR Credit. Depending on which software you use, you might have to dig for it. Some software programs are really easy and it will just pop up automatically when it recognizes that you have multiple states.

Remember the tax liability number I told you to remember? Well that’s going to go on your NR Credit form. Some software is really good at automatically plugging it in for you. In some other programs, you’ll have to manually enter it. The important thing is that you know that number needs to be there and that you know to look for it.

I’m getting a really big refund from my resident state, can that be right? Most likely not. When you see an unusually large state refund, it’s always a good idea to take a closer look. Check to make sure that the income numbers match up to the federal return and that the Credit for Taxes paid to another state was computed properly. It’s rare to get a big refund to your resident state unless you’ve had some other income that had withholding. The credit for taxes paid to another state usually will almost never be more than what you would have paid for taxes in your own state.

I’m showing that I owe a whole lot of money to my home state, can that be right? Maybe yes, but maybe no. The first thing you want to check is that you’ve taken your credit for taxes paid to another state. That’s the most common problem when you owe a lot. Other factors could be working in a no-tax state while you’re living in a taxing state. For example, let’s say you live in Louisianna but work across the border in Texas. You won’t pay taxes in Texas so there’ll be no credit for taxes paid there. In a case like that, you’ll definitely owe. Also, you could have a big difference because the states have different tax rates. For example: Missouri’s tax rate used to be twice as much as Illinois. If you lived in Missouri and worked in Illinois (opposite of our example earlier), you’d still owe Missouri about as much again as what you paid Illinois. (Now the rates are much closer, but people who live in Missouri and work in Illinois will still wind up owing extra for their Missouri taxes.)

What if I live in a reciprocal state? Some states have arrangements with their neighboring states to share tax information and tax revenues. In a situation like that, you’ll just pay taxes in your home state. The states will actually sort out who gets how much of your tax money. Usually, it’s simply a matter of checking the “reciprocal state” button in the software.
For most people, if your federal return is fairly simple, preparing two states is not that difficult. Use a good software program, follow these directions, and you should be fine.

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269 thoughts on “Two State Tax Returns: Live in One State, Work in Another

  1. We’re from FL, my wife just started grad school in SC. The company I work for has another business in SC that they transferred me to. Technically we are living in SC (w/ 2 high schoolers), but we are renting here & own a home in FL which we plan to return to when she is done (4+ yrs). Can we maintain our FL residency, & file a non-resident return for my income in SC or do we have to switch everything over?

  2. Hi Jan,

    I have an interesting situation that I’m a bit confused by. I work in a rotational program for a major automotive company. My team is based in Michigan and my payroll/headcount is taken on by them. I have been sent to Texas to work on my next rotation for the next 9 months in an assembly plant, but organizationally I have not moved. Therefore my working location in the eyes of the company is still in Michigan, meanwhile from now until early next year I will be working and living full time in Texas. I am still seeing Michigan taxes pulled out of my paycheck and I’m unsure how it should work.

    When I go to fill my taxes out next April, will I only fill out Michigan state tax forms because that’s where I am technically “working” as far as the company is concerned? I called payroll and they said that unless I am officially moved from the Rotational Program’s department to the one in Texas (which wouldn’t happen) then I am technically still considered to be working in Michigan jurisdiction.

    Thanks for your advice.

  3. Hi Tina,
    Illinois is having serious income issues so I’m thinking they are behind this. Normally, for only 7 days you wouldn’t worry about that (although for some states earning even $1 can trigger a tax requirement.) I’d do the IL W4.

  4. Hi Henry,
    I see that quite often actually. I suspect that your employer doesn’t have any other Indiana employees and doesn’t want to go through the paperwork of paying the Indiana Department of Revenue for it’s employee. There would be the withholding and the unemployment taxes. I do understand that. But technically, you should not be paying Missouri taxes after you move to Indiana. What I would do is have your employer just stop the Missouri withholding in 2017, and you make estimated tax payments to Indiana. Since the Indiana tax rate is lower than Missouri – I’m guessing it’s probably in your best interest to make sure that you’re only taxed in Missouri for the time you really are in Missouri. As long as your W2 says that you work in Missouri, Missouri is going to tax you on that income.
    I don’t know if your employer will go for it, but maybe he’d be willing to increase your pay to cover the extra tax you have to pay for being a Missouri employee. I have a client that I have to figure that for him every year so that his employer can reimburse him for the states they have him working in. It’s a thought.

  5. Hi Jason,
    Four years? Technically, you’re a South Carolina resident if you expect to be there for 4 years. Unless you’re in the Military, but I don’t think that’s the case. You can always go back to Florida, but four years makes you a resident of SC.

  6. Hi Nick,
    A couple of things: First – since you live in Michigan, Michigan will tax your Texas income so you may as well have the Michigan withholding. Your company is right there.
    But- here’s the fun part! You’re on a temporary assignment! So, your expenses are “employee business expenses”. So, does the company pay for your housing? Your meals, your transportation? I’m guessing they pay for some things, but not everything. When you are on a temporary assignment for less than a year, all that can be tax deductible. Using form 2106 – for employee business expenses, this can be a huge help on your tax return. Now, if your company pays for all of your living expenses, – well it’s better to have the company pay them than to get a tax deduction. But- if you’re footing the bill – there’s a tax deduction to be had there.

  7. Hi Jan,

    Thank you very much for the response. You mentioned that for 2017, have my employer just stop withholding MO tax. How is this done? Do I file a MO W-4 with “EXEMPT” in line #7? I include the instruction below. It sounds like I can only do this in 2018 since I still have to pay some MO tax for 2016. For 2017 I will be clean of MO. Do I get it right?

    7. Exempt Status: If you had a right to a refund of all of your Missouri income tax withheld last year because you had no tax liability and this year you expect a refund of all Missouri income tax withheld because you expect to have no tax liability, write “Exempt” on Line 7. See information below. ..

  8. I had my cousin do my taxes for about two years each time she did them I was owing to my resident state. I wasn’t working in Rhode island, I didn’t own a home. I was just living in Rhode island. So I decided to go to a certified tax preparer and I haven’t paid anything since then. Why is that?
    I paid over 300.00 each time

  9. Hi Francine,
    Since you’re using a professional now, why don’t you ask her what the difference is? Normally, I’d guess that your cousin didn’t claim the credit for taxes paid to another state. But I’m not looking at it, maybe it’s something completely different. You’re paid preparer would know.

  10. I live in Tennessee and work just 16 hours in Alabama. Should my employer be taking Alabama state taxes out on me . I don’t live in Alabama and only work 16 hours.

  11. What if an employee elects to pay state taxes for both states? We have many Illinois residents working in Missouri who have asked to have taxes withheld from both Missouri and Illinois so they do not owe as much to Illinois at tax time. Is this allowed?

  12. Hi Gloria,
    Even though you only work 16 hours, your income in Alabama will be taxed by Alabama, so yes, your employer should take out Alabama taxes for you. Now, if you wind up not owing any Alabama tax, you’ll get it back when you file your Alabama tax return. But your employer is supposed to be withholding Alabama taxes.

  13. Hi Chris,
    You are not required to withhold Illinois taxes, but you may volunteer to withhold Illinois taxes for your employees. You would need to register with the state of Illinois and obtain a tax ID number and such. Here’s a link to the Illinois Pub 130 http://www.revenue.state.il.us/publications/pubs/PUB-130.pdf. Since you have a number of cross state employees, it makes sense to set this up. Remember though, your Illinois residents will get a credit for the tax that they do pay to Missouri so they won’t want to withhold the full amount of what would be required if they were working in Illinois.

    Just a note for reference: it’s weird – the Missouri tax rate is 6%. The Illinois tax rate is 3.75%. Because of the credit for taxes paid to another state, you would think the Illinois workers would never have to pay Illinois tax. But Missouri allows numerous deductions and Illinois is basically a flat tax so often, Illinois residents that work in Missouri often wind up still having to pay in at tax time.

  14. Jan,

    I live in Illinois but work in Missouri. My company is reporting wages for both states and withholding taxes in both states. The company says, that is how the payroll software is calculating it. I feel I am being double taxed. How can I stop this?

  15. Hi Sandy,
    This is so funny. (Not to you, you’re getting double taxed. I mean odd funny, not ha-ha funny.) Last week I just had someone complaining because they wanted withholding for both Missouri and Illinois and their company wouldn’t do it for them!
    Anyway–generally, you are taxed on your payroll for the state that you work in, not the state that you live in. Sometimes, though, when the tax rates are very different, it’s good to have both. For example, the tax rate for Illinois is 3.75% and the Missouri tax rate is 6%. So if you live in Missouri, even though you get a credit for your Illinois taxes, you may still want a little more withheld to cover Missouri’s higher tax rate.
    So, really you’ll want to see how your tax return comes out this year. If you wind up with a huge Missouri refund, then you’ll definitely want to change the Missouri withholding if not remove it altogether. (I’m thinking that you’d need to submit a new Missouri W4 to your employer claiming more exemptions.)
    This is just a total shoot from the hip guess here – I would think that if your Missouri withholding is higher than your Illinois withholding – that’s probably too much. If your Missouri withholding is less than your Illinois withholding – I’m guessing it’s probably okay. Like I said, I’m guessing blind here.

  16. Hi
    I recently took a job in CT, as a teacher, but kept my house in VT to maintain legal residence here for at least 3 years. I come back at least 3 times a month for weekends and all school vacations. Am I able to deduct the driving expenses and our the condo rental I have in CT?

  17. Hi Susan,
    If you were only working in CT for one year, then you could. But since you have a three your commitment, then no, you can’t. At least not as “you live in Vermont but work in Connecticut.” Now, could you make something work here? Maybe. What if you had a small business in Vermont? Then you would be driving between two businesses. Just a thought – not sure that’s an option for you but I figured that I should toss it out there.

  18. Hi Jan,

    If I work from home in Colorado for my Florida based company, is my employer required to withhold Colorado state taxes or can I just file this myself? I’m being told that tax laws are just too complicated for them to allow me to work from home.

  19. Hi Sara,
    What do they want you to do? Move to Florida? Your company does not want to file Colorado tax paperwork. I would just make my own Colorado estimated tax payments.

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