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.


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

  1. Hi Jan,

    I just accepted a job from an Illinois based company where I will be working from my home in California. However, while completing New Hire information online I noticed my employer has me down as Worked In: Illinois/Lived In: California. Is this correct? Thanks.

  2. Hi Julie,
    I believe that since you are living and working in California, that your employer should report it that way. That said, your employer may not be an authorized California employer and may have no choice but to list you as working in Illinois. I’d talk to the HR department. If you’re the only on in CA–that could be the problem. And getting them accepted as a CA employer my be the issue. If that’s the case, and you want the job–I guess you’re now working in Illinois.
    But ask first–is it just an HR mistake or is there a problem with you being in CA? The work around is just filing an Illinois tax return.

  3. Awesome Jan! Thank you. One last question for you. I used my VA address when I turned in my W2 (since that’s the address I currently reside for work purpose) so I believe they’re taking taxes out from income accordingly to VA’s tax rate. Would I still just file DC non-resident and a PA resident? Because I know VA has to play a role in there somewhere correct?

  4. Hi Mike W.,
    Although–how long are you living in VA? Because you may just cross over into becoming a VA resident. In that case you’d file a Virginia return and not file in PA at all.

  5. Hey Jan,
    It has been 4 months since I’ve been in VA. I’ll be staying in VA for two years for work because of my contract. However, family is in PA, my house is in PA, along with the license as well. so I thought I can leave that as my permanent residence because basically, its 3-4 days in VA because of work in DC and the rest of the week is in PA. Juggling between these three states makes it all so complicated when it comes to filing tax.

    Mike W.

  6. Hi Mike,
    I would put PA as your resident state. DC is your non-resident state (yes, it’s not a state but for tax purposes it is.) I would not file VA at all. You’re going home to PA every week, that’s your residence. I agree with you.

  7. I currently work in Texas but live in Arkansas. I’m having to pay Arkansas State Income Tax but we do all our shopping in Texas that does not have a income tax and a low Sales Tax. Arkansas charges Tax on everything you buy at a rate of 11.5%. Texas Sales Tax is 8.25%. The State of Arkansas currently has a Border State Tax Exemption if you live in the city limits. Is there a tax break from Arkansas Taxes or do I need to move to Texas.

  8. Hi Steve,
    I used to live in Texas. I really liked Texas. I also like Arkansas, although I’ve never lived there. People in Arkansas have always seemed really friendly when I’ve visited.
    Besides the income taxes, there’s also property taxes, excise taxes, schools, neighborhoods, politics, cost of living, and all sorts of other stuff. So you’d save on income taxes by moving to Texas. But how much would it cost you to leave where you live right now?
    I don’t know of any tax break you can get in Arkansas for working in Texas. I guess the big question is–will the money you save on income taxes by moving to Texas outweigh what you lose by leaving your home? You’re the only one who can truly answer that question.

  9. My son was an Illinois resident and worked in Missouri in 2014. He filed an Illinois , mo and il schedule CR for 2014. He did the Illinois return on line and paid his tax owed. He did not include a copy of his Missouri return ( he did not think it is required.) He received a return correction notice for owing 1200 plus in taxes for 2014. No name, no phone number and no explanation with his form. He talked to someone at 2177823336 to understand what he needed to do. They were not sure what the problem was, just paid 1200, but he was not getting credit for taxes paid to MO. even though he completed il schedule CR . So he returned the letter, a note and a copy of the Mo return. He just received in Aug another letter ” Final Notice of Tax Due” they just want him to pay 1284.00. I think he owes nothing with credit paid to MO. I think this is harassment and scare tactics .

  10. Hi Kevin,
    Hmmmmmm. You’re right that Illinois does not ask for a copy of the Missouri return. It sounds like he did the right thing by sending a copy of the Missouri return with an explanation. It could be that his response just hasn’t been processed yet.
    I would call Illinois again just to follow up. If there’s another reason IL is asking for money, they should be able to explain it. If it’s just the issue of they didn’t process the MO credit yet, they should at least have a record of the conversation and know that he’s being a responsible tax payer.

  11. Hi Jan, I am currently living and working in VA. We will be moving to WA in a couple of months and working remotely to my current employer in VA. How should income tax be filed? Thanks

  12. Hi Dan,
    Washington state has no state income tax. Since you will be living and working in Washington state, even though your employer will still be in Virginia, your tax home will be Washington. You will file a part year return for Virginia for the time you still lived and worked in Virginia.

  13. The Texas/Arkansas “border state exemption” applies to AR state income tax for employees who BOTH LIVE and WORK within the city limits of Texarkana.

  14. I have an Iowa employee working in Illinois. We are not set up to pay taxes in Iowa and he has filed the Non-resident form. I am not taking out any state tax. My question is…should this be Iowa income or Illinois income?

  15. Hi Kathy,
    Taxes should be withheld for the state a person works in. So, since your employee works in Illinois, that’s where the withholding should be paid.

  16. Hi Jan, I am currently living and working remotely (telework) in FL (since the last week of Dec 2014). My current employer is in VA. I attend VA work meetings maybe 3-4 times out of the year. FL has no state taxes. How should income tax be filed? Thanks!

  17. Hi Steve,
    It sounds to me like your are a Florida resident – so no state tax return at all. Now, if your meetings in VA ran for a few weeks each time, then I supposed you’d have some Virginia income to account for. But a general business meeting lasting a few days or less, that doesn’t even count as “working in that state”.
    You W2 should show nothing in the state box. But, if you do get a VA W2, then you’ll be required to complete a Virginia return, but show that you did not live there and request a refund on any tax that was withheld.

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