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

Posted on: 08/26/11 325 Comments

Photo by Jimmy Emerson on Flickr.com

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

  1. I live in IN and got a job in MO. I rented an apartment in MO for 5 months, living and working there with some travel back and forth. My family still live in IN the whole time. Now I start to work from home in IN and terminated the lease. I assume for 2016, I will be resident in IN and part-time resident in MO. For 2017, I will not need to pay any MO tax, just IN tax. Am I correct?

    My employer continues to withhold MO tax because I am officially assigned to that office. I asked them to change the withholding to IN. But they don’t want to do that. Any advise on this situation?

  2. I am a CA resident. I am being employed by a CA employer (as a temp through a temp agency), to work 7 days in Illinois. I’m being asked to complete and IL W4 (in addition to my CA docs). Now, I’ve done this same job, same employer, same temp agency, for the past 9 years (I’ll work in various different states) and have NEVER been asked to complete something like this. I’ve had issues in the past with the temp agency making errors w/my pay, so I’m hesitant to complete anything like this. thoughts?

  3. Hi Dena,
    There’s nothing more frustrating than trying to deal with an agency that “doesn’t get it.” Somewhere, somehow, something got triggered that your husband lived in Georgia. At least in their eyes. What I would do is file a Georgia non-resident tax return showing no income earned in Georgia, and attach copies of his California and/or Maryland returns showing that he paid his taxes there. If that doesn’t solve your problem, I don’t know what will.

  4. Hi Dave,
    So you’re working in Illinois so you’re going to have to file an Illinois and a Missouri tax return. 2015 was really messed up for that, we’ll see how 2016 goes.

    Here’s the situation, your job will withhold taxes for Illinois. You will file an Illinois non-resident return and pay tax to them (or maybe get a refund.) Then, you’ll file your Missouri tax return as a resident. Missouri will give you a credit for the tax that you paid to Illinois. The Missouri tax rate is higher than the Illinois tax rate, so often, Missouri people have to pay in when they file their MO tax return.

    But – Missouri has a lot more deductions than Illinois has, – so often, you’ll owe nothing more to Missouri because your taxes really are lower than the Illinois taxes. It’s kind of crazy.

    So, it’s not always easy to tell. Most companies will only withhold for the state that you actually work in. If you think that you’ll need to pay in to Missouri, then you can file MO estimated taxes. You can even do that online. Here’s a link: http://dor.mo.gov/personal/payonline.php

    But you might not owe at all. If you’re concerned about a balance due, you can set aside 2.25% of your income to cover the potential difference. (The Illinois tax rate is 3.75% and Missouri is 6%.)

  5. Hi Jan, My husband worked in California a few year and moved back to Maryland his home state (before we married). Several years later he received state tax letters from California, Maryland and Georgia. He fixed California and Maryland but he never worked in Georgia. I worked and lived in Georgia but he didn’t. We didn’t own anything together but the state of Georgia keeps sending him mail to pay past state taxes. He has contacted them several times and told then he lived in Maryland the years they are requesting payment but they keep sending letters. Any suggestions on how to get this fixed would be appreciated.

  6. Hello,

    I recently begun working across the state border in Illinois. I reside in Missouri but I can use over the river and work in Illinois.

    Is there a special form I need to fill out asides my Federal and IL withholding? I heard from someone else in the same situation there was, but they did not remember what it is called. I’m just worried I will owe big at tax time since MO taxes are different than IL.

    Thanks again for your help!

  7. Hi Allan,
    You want to retire in South Carolina and you want to buy your condo now, but you want to keep working in Ohio for three years. So it sounds to me like you’re really going to live in Ohio for three more years, but own property in SC. So, why not just file OH taxes? Even if you live in SC and commute to OH, you’re still filing and paying OH taxes.
    If you want, you can buy your SC property now, and just hold it. Or, your can rent it and may earn some income that way (I have a couple of clients doing that actually.)
    Bottom line: you won’t save any money on your Ohio income taxes using a SC address. So the only question for you is – is it worth it for you to buy the property now using all the other reasons you’ve cited?

  8. I am 58 and I would like to buy a modest condo in so. carolina for retirement. I still plan to work in Ohio for another 3 years. Idea is if I can get a good deal with good interest rates, may be a good start instead of waiting 3 more years when home prices may be higher and interest is higher. Condo may just sit there until we use for vacation or until I move down. Can I work in Ohio and have a so. carolina address on paper for 3 years. Would it be worth it if is allowable?

  10. Hi Sasha,
    Your situation is a bit tricky. Technically, you were a part year resident of GA and a part year resident of SC while being a non-resident of GA. Which makes perfectly good sense to a human, but most computer software goes a little bonkers when you try to input that. You usually can’t do “part year” and “credit for taxes paid to another state” on the same return.
    So…the easy solution, is to put yourself as a South Carolina resident and a GA non-resident – claiming a credit in SA for the tax you paid to GA.

    If you go with the techcially proper way, you may have to prepare the return by hand. And it might be a good exercise to do this just to make sure you’re not losing anything by filing it the easy way. But often, the taxes turn out the same either way (or very close) and as long as the states get their proper due everybody’s happy.

  11. We came to Texas from oklahoma over a year ago for work, our home is still in oklahoma, I go back and forth alot, my husband goes when he gets enough time off. We are paying 1100.00 mo. rent in texas and our mortgage in oklahoma, is the rent deductible?

  12. Hi Jan,
    I moved to SC from GA in August. I still work in GA full time on a military base as a civilian (DOD). Do I have to file in both states? I am a resident of SC now and GA is my non resident state? Am I a part year resident of both since I moved in Aug? What do I do? Thank you so much for your great advice!

  13. Hi Erick,
    You work in PA so you should pay your state taxes to PA. You should get a credit in NJ for the tax you pay to PA. I think you should bring your paperwork into a professional. My gut says your taxes are wrong, but I don’t have all the info. Have someone take a look.

  14. Hi Jennifer,
    Technically, your husband’s employer should take out Connecticut taxes. He will be living and working in Connecticut. He should be filing as a CT resident. And there should be no MI taxes taken out.

    Now, he could file a Michigan only state return, since Michigan took out the taxes. But once CT sees that CT address on his federal tax return (IRS shares that info with the states) you’re going to get a nice little letter from CT asking you for their share of your state tax money.

    So, I recommend that his employer withhold for the state their employee is working in. You file part year returns for the states for the time that you live there.

    But you do owe CT taxes on the income you earn there no matter what.

  15. Hi Julie,
    Your corporation is based in Arizona – so all of the business is conducted in Arizona, right? But you live in Kentucky. So how are you conducting your business in Arizona?

    This is important. Because now you have “nexus” in Kentucky. This could have an impact on things like sales tax if you do internet sales. I could affect your W2s.

    I would not ignore Kentucky. You need to sit down with a professional and dot your i’s and cross your t’s. Make sure that you’re doing what you need to do to be straight with the state that you are living in.

  16. So I live in NJ and work in PA. It turns out that my employer put me down as a PA resident for the first three paychecks. I got that corrected to reflect that I am a NJ resident. However, now I am working on my taxes and NJ says I owe a lot of money and PA says I don’t get a refund. Shouldn’t I get my money back paid to PA so I can pay NJ? Then the software said there could be interest on the underpayment to NJ. Can I go after my employer to pay for that since they screwed up the paperwork? Thank you so much for your help!

  17. My husband and I have a house in Michigan. His employer relocated him to Connecticut for 2 years. We are keeping our house and letting a cousin live in it until we come back. We rent a small apartment in Connecticut. Our plans are to definitely return to Michigan as soon as his assignment is complete. His employer is based in Michigan and takes out taxes for the state of Michigan. Would we have to file a Resident return For Michigan, and then a Resident return for Connecticut or would one of them be Non-Resident?

  18. Our Corporation is based in AZ. We now live in KY basically retired – earning $800/year each. On W2 I show AZ as State with that State employer number. Do not have an employer number for KY as not doing any business here. According to what I understand about KY & AZ our income is under what is needed to report for either State. Mostly Social Security with about a combined extra income of about 15K.

    Corporation has not earned any KY income.

    Am I correct in ignoring KY? Thank you so much.

  19. Hi Noemi,
    did you move to Texas permanently? Are you going to live there for more than a year? Are you college students who are moving back to your parent’s home?
    Since you are married adults, I would put the Texas address on your return, that’s where you live. But for the 2015 tax year, you will claim that you were part year residents of Oklahoma. If you claim the Oklahoma address, then you should would be expected to pay income tax to Oklahoma on all of the income that you earned in Texas.

  20. Hi Rohit,
    Generally an employer withholds only for the state you actually work in. I would think that your employer would be withholding for MO taxes, not KS. Also, since you work in Kansas City, there is also a Kansas City city earnings tax if you work within the actual city limits.
    Your wife’s employer is very gracious to withhold for both KS and MO, but I’m wondering if that is too much withholding as KS should give you a credit for the taxes that you do pay to Missouri.

    Sor for 2015, technically you are a resident of KS and a non-resident of MO. Your wife is a part year resident of California and a part year resident of Kansas and a non resident of Missouri.

    That said, this situation gets screwy in the software. When you’ve got a part-year and a non-resident situation in the same year the software doesn’t always work right so you’re doing some of it by hand.

    Also, the California rules are a bit tricky – if you’re doing the taxes yourself, read the lines on the return very carefully. What makes sense on a KS or MO return is not the same as a CA return. The rules are different! I’ve seen people get burned. You should get professional help from someone with CA experience. Ask, how many California returns have you done? How many were audited? Did you win the audit? If not, did you learn from it? Seriously, I do a lot of state returns, but the California return is not like any other state.

  21. Hi Jan,

    My husband and I moved to Texas last year, he moved in June and I moved in November. I realize I’ll have to file state taxes through OK for wages earned there and do not have to file a Texas state income tax form. My question is in regards to my federal income tax form and W-4. Our house, driver’s licenses, and license plates are in/from Oklahoma but we live and work in Texas, do I claim Texas as my state of residence and put our apartment address on both my W-4 and federal income tax form? Or do I put our permanent home address in OK on both my W-4 and federal income tax form, which happens to be the address I prefer all official mail go to?

    The reason I ask is I was told that the IRS prefers we use our permanent address in OK that we’ve filed with in the past. However, by doing so I’m concerned that this will affect future returns as it will appear as if we are still living in OK owing OK state taxes when in fact we’re working and living in TX and the information will be inconsistent. I appreciate any advice in the matter, thank you!

  22. Hi Jan,

    I am living in Kansas and working in Kansas City, MO for the past 2 years and my employer runs my payroll only for KS state taxes. Is it required by me to file for resident (KS) and non resident (MO) state taxes and get my payroll changed by my employer. Also, my wife recently shifted base from California and started working in a similar fashion as me, staying in Kansas while working in Kansas city, MO and her employer runs her payroll for deduction on both KS and MO state taxes. So, while filing taxes for FY 2015 as married filing jointly, should I file for 2 state taxes (resident -KS, non-resident MO) and my wife for 3 states (resident – CA for partial year, resident – KS and non-resident – MO for the later part of the year).

  23. Hi Raj,,
    So you’re going to work in California, but maintain your home in Texas. If you travel to work in California, they will withhold taxes and you will pay California income tax on that money.
    If you work for a company that is in California, but you will work and live in Texas, they should not withhold anything as you live and work in Texas and you would pay Texas income taxes. But – there are no Texas income taxes so there’s no tax to pay.

    Now–some states are getting kind of ugly about this. For example: New York is actually reviewing peoples ATM receipts. If you say you live in Florida, but you have a bunch of ATM fees for NY, they’re hitting you with residency and taxing your income. I haven’t heard of California doing that yet, but I suspect lots of states will follow New York’s lead on that. So, if you’re working in California, make sure you pay them their tax, it’s not worth the hassle to fight if you’re in the wrong.

  24. Hi,

    I am planning to work in California but not wanting to leave Texas where our home is. My understanding is that I will be taxed at CA tax rate but would get refund/credit of extra taxes paid in Texas. Could you please clarify this?

  25. Hi Arianna,
    You son will never get back the St Louis City taxes. If he works here, St Louis will tax his income. He will get a credit for the taxes he pays to the City though, just like the credit for taxes paid to Missouri so that helps quite a bit.
    Now some companies can withhold both IL and MO taxes, but some can’t seem to handle it. Why I’m not sure. But he can ask his HR department if they can take out of IL. My best guess is that if he does no work in IL that they can’t do IL withholding.
    What I recommend is that when he files his tax return, take his IL balance due, divide by 4 (if he’s worked a full year) and make estimated tax payments to IL of that amount. If he didn’t work a full year, have his tax preparer run a projection for him to figure his estimated tax payments.

  26. Hi Ruth,
    I would say that the back pay was earned in PA so the tax on that income should be paid to PA. I would file a Virginia resident return, and a PA non-resident return. Claim a credit on your VA return for taxes paid to PA. That’s technically the correct thing to do.
    If the W2 shows no withholdings to PA – local or state, then you could get away with only claiming the income on your VA return. (Because there is no documentation otherwise.) But technically, that was money that was earned in PA and the tax on that income should be paid to that state.

  27. My son recently got a job in St. Louis, MO, however we live in IL. It seems he’s also paying St. Louis city taxes. I understand he gets a “credit” on his IL state return for taxes paid in MO, but how does he get his payment of city taxes back? Also, is there a way, since IL state taxes are so much higher, to get something taken out of his check for IL? Thanks in advance.

  28. My husband is clergy. We moved from PA to VA in November 2014. The church he Pastored closed and upon the sale of the bldg April 2015, he received a check for back pay owed. As a minister, he had opted out of Soc. Sec. and the only taxes being withheld during his tenure were for LOCAL PA taxes. His pay was divided between a Housing Allowance and Salary, with only local income tax being withheld from the salary portion. Since he wasn’t any longer a resident of PA when he received the income, are there any taxes due? No taxes were withheld. He is still a minister, but employed full-time by Colonial Williamsburg Foundation in VA and is receiving no income from his ministry duties. Thank you in advance!

  30. Hi Jan:

    I recently just moved to Colorado from Illinois. I still work for my previous employer from home in Colorado.

    How do I go about tax withholding’s?

    Thank you

  31. 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.

  32. 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!

  33. 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.

  34. 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?

  37. 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.

  38. Is there a listing for all states that show the regulations Taxes for lived in and worked in state?

  39. 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.

  40. 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

  41. 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.

  42. 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 .

  43. 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.

  44. 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.

  45. 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.

  46. 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.

  47. 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.

  48. 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?

  49. 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.

  50. 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.

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