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

  1. Hi Tom,
    You can deduct housing costs as an “employee business expense” if the job is temporary – meaning it is intended to last for one year or less. If the new position is permanent – or a contract that is longer than a year, her rent would not be considered a deduction.

    Now, since she has work in both states, you could deduct the travel between the two jobs. Also, if she works from home near her university teaching job – she may be able to claim a home office deduction – if it’s for the convenience of her employer. (Might have to clear that one with the school.)

  2. Hi Erin,
    Good question. If you only had Missouri withholding, and you got a big Kansas refund – than I’d be worried. But if you had Kansas withholding and got a Kansas refund, then I wouldn’t worry so much. If you’re using a tax software, it’s probably right. Programs like Turbo Tax usually compute two states just fine. It’s when you have three or more states where it can get messed up. I hope that helps.

  3. My wife started a new university teaching job in another state, where she gets a W2. Her main residence is still at our home where she also teaches privately and gives concerts receiving 1099s. So she has income in both states.
    Can she deduct the rent she pays at the other state and should she enter that there as non reimbursed employee expenses? Same for travel costs between both locations?
    She definitely makes more at the W2 teaching job.
    Thx

  4. Hi! I live in Kansas, but work in Missouri so I paid taxes to Missouri and Kansas (although the amount paid to Kansas wasn’t very much in comparison) and a Kansas City locality tax. After reading the part in your article about how I probably shouldn’t be getting a big refund from my resident state, I am concerned that I might be calculating the out of state tax credit incorrectly…how do I know when the refund from the resident state is TOO big?

  5. What if you live in Missouri and receive your paycheck from a business in Missouri, but your office is located in Illinois?

  6. I moved from Illinois to Florida in June of 2016. I started working part time remotely from Florida with my old Illinois based company as a 1099 pay. They then hired me back on full time to work remote from Florida. After 6 weeks I was laid off and started receiving Illinois Unemployment benefits while still living in Florida.

    I don’t believe I have to claim the 1099 earning on my Illinois return since I was working if Florida, but am not sure about the unemployment benefits received. Would these still be claimed as Illinois income even though I was living in Florida?

  7. Hi Marie,
    What does your W2 say? Down at the bottom, in box 15 it says the state that your wages were paid in. In box 16, it says how much you were paid in that state. Let your W2 be your guide.
    Also, are you using tax software? It should figure that out for you. Try this: Do Your Own Taxes Online

  8. Hi

    I live in MA and worked for a staffing agency based in MA. The assignment was for a tech company in RI. I commuted to work each day for 8 months. But now that it is time to do my taxes I’m unsure how to fill out the nonresident form. It asks how much income did I earn in that state. Would I put all or none since the staffing agency paid me during my time at that company.

  9. Hi Jim,
    If you’re working in Colorado you have to pay Colorado income tax. Basically, whatever state you work in is the state you pay tax in. Now, if you never work in Denver, but only work in Texas, then they should not be withholding Colorado income tax.

  10. I have a question. I drive for a trucking company based in Denver, I live in Texas, Texas does not have state income tax, how do I prove that to the company in Colorado?Thank you

  11. Hi Stacey,
    Although Missouri is special to me, since I live here. But no, your husband should not have to pay Missouri income tax if he is living and working in Florida.

  12. Hi Heather,
    You are correct. If you live and work in Florida – then you should not be subject to Missouri withholding. You will file a Missouri tax return as a non-resident. Show that the wages were not earned in MO on the return, you will receive a refund for the taxes that were withheld.

    Then, you should contact the HR department at the company you are working for and have them change the withholding for you.

  13. I live in Florida and work part-time from my home in Florida. The company that I work for is located in St.Louis, Missouri. Florida does NOT have any state taxes.

    I just received my W2 and in Box 15 it lists the state as MO and there are state wages listed in Box 16. I thought it should list FL and there should be no dollars listed in Box 16.

    I was under the impression that I do NOT have to pay any taxes to the state of Missouri, since my wages were physically earned in the state of FL, which does NOT have state taxes.

    Is this a correct assumption? And how do I file correctly, non-resident of Missouri?

    Any suggestions would be very much appreciated.

  14. Hi Paul,
    Yep, that’s the classic example of when the software just doesn’t work. Missouri tax software won’t allow you to claim part year residency AND claim a credit for taxes paid to another state at the same time.

    One solution is to prepare the returns by hand. But, you will get a pretty good result if you just claim Illinois residency with a credit for taxes paid to Missouri. Missouri will get their fair share of money because you worked there. Illinois will get their fair share. The difference would be minimal, and it solves your software issue.

  15. Hi Jan,
    My husband has a job offer for an organization in Missouri, but he will be a remote worker living and working in Florida from his home office. He’s telling me that he will be required to pay MO state income tax. This doesn’t quite make sense to me, since right now he is a remote worker for a company in PA and he has never paid state income tax to PA. Is MO a special case when it comes to remote workers?

  16. I lived in Illinois from 1-1-17 – 10/31/17. I lived in Missouri from 11/1/17 – 12/31/17. I worked in Missouri the whole year. This scenario seems to confuse several software programs I have tried to use as the results always show a large amount owed to Illinois. Any suggestions would be very much appreciated.

  17. Hi Nina,
    When you file your Oklahoma tax return, you’ll report the income that you actually earned in Oklahoma. You’ll be doing a “part year” return. You should get a refund for any excess Oklahoma tax that you paid.

  18. Hi Jan,
    I was working in Oklahoma and my company moved me to Texas where their other office is.. but I am still paying Oklahoma tax on my paycheck even after informing the payroll dept.. is it possible to get that tax back for the months I dint live in Oklahoma

  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.

  20. 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.

  21. 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.

  22. 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?

  23. 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.

  24. 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?

  25. 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.

  26. 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.

  27. 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?

  28. 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.

  29. 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.

  30. 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

  31. 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. ..

  32. 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.

  33. 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.

  34. 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.

  35. 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.

  36. 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.

  37. 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?

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