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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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Hi Henry,
Thank you for sharing your story!
This forum has been very helpful for me. I just want to share my experience.
I work from home in Indiana. My assigned office is in MO, but I has not been there at all for 2017. Company is multi-national in NY. Due to internal paperwork issue, I have MO tax withholding for 2017.
I submitted non-resident MO return with 0% allocation. They “corrected” it to 100%. I follow-up with a written explanation and some evidence of my living/working in IN the whole time. This includes utility bill, IN state resident property tax, bank statement (with transactions all in IN), even phone bills showing all calls to/from IN.
After waiting for some time, I call MO office. The person I talked to actually gave a the wrong info by saying since my office is in MO, I will have to pay MO tax, regardless of the physical location where I actually worked. This is the total opposite of what I have learned from reading this forum.
I was upset but ready to revise my IN tax return to claim credit for taxes paid to other state. I know it is unfair to IN but it is a lot of money.
Thne miracle happened. A check came in a week later with the full 100% refund from MO! Someone in MO office knows the rule after all.
Hi Jennifer,
You withhold state employment taxes for the state your employee is working in, it doesn’t matter where they live, only where they work.
Hi PDale,
since you will be working in Missouri, you will be paying Missouri state income tax for the time you are working here. Since you’ll be living in Missouri for over 183 days, you will be considered a Missouri resident – or at least a part year resident for 2018.
So you’ll probably file a part year Missouri and a part year Kentucky tax return.
Hi KC,
since your only income was in NY, then I would file a NY resident return. You could file an Arkansas non-resident return showing no income, just to let them know that you didn’t have any income in Arkansas. If you don’t, you may get a letter from them asking why you filed a federal return showing an Arkansas address but didn’t file an Arkansas return. If that happens, just send them a letter explaining that you had no income while living in Arkansas.
Hi Angela,
Your W2s say Missouri because your employer is withholding Missouri tax, not Illinois tax. That’s the right way to do it, you withhold for the state you work in, not the one you live in. Illinois doesn’t actually need your W2 showing the Missouri tax, but if you’re sending W2s, it’s not going to hurt anything to send them the Missouri W2.
Hi Julie,
You son would be a “non-resident” of DC. He is not required to file a return unless he is entitled to a refund. In that case, he would file form D-40B. I think he has to mail that in. I haven’t been able to e-file one with my software.
Hi Dawn,
It seems to me that if he works in Arkansas, he is subject to Arkansas state income tax for any income he earns there. I’ll defer to the Arkansas auditor, but I think he needs to pay Arkansas taxes.
What if I have an employee that is registered to live in another state, but will be working in another state and will be also residing in that state while they are working until they are able to move to the state they are working in. Do we have to withhold taxes in both states? Even though they are temp living in the state they are working in?
Okay I am taking a job in St. Louis in two weeks (this is for 2018). I live in Kentucky. I have done my W-4 and for the state of Missouri my withholding statement. So do I need to do one for Kentucky (as I’ll keep my residence here at least until the end of the year) or do I take care of this during tax season next year? Also am I going to get screwed in the end? If so I’ll keep my house in Kentucky as a second home and officially make residency in Missouri. Also, Kentucky has local or city taxes and not sure how this will work. Very confusing to say the least, but I want to take the best path, financially.
Hello. I was employed in NY (6 months) before moving to ARKansas for the half. Now when I moved to Arkansas I became unemployed. How do I go about filling this even though I did not work at all in Arkansas? Do I need to file Arkansas state form? So confusing please help as the only income was in NY.
Hi. I live in Illinois and work in Missouri. I noticed I have 2 w2s marked Missouri and none marked for Illinois. I need to send a W2 to Illinois. Is the 2nd one OK to send to Illinois?
I have an adult-aged child who did a paid internship in Washington, DC for 3 months last summer. I am trying to figure out if I need to file in DC. If so, I need to figure out HOW to file in DC. Any suggestions would be helpful. Thank you!
My husband and I live in Texas but he works in Arkansas. Texas has no state tax, but Arkansas does. My husband has Arkansas state taxes taken out of every check. For 2017, he is only getting back about 20% of what he paid to Arkansas. He called the tax office in Arkansas and was told by an auditor that if he has our tax return amended and sends in his out of state CDL (my husband drives truck), he should get all the money back. Does anyone know if this is correct?
Hi M,
Okay you are a resident of Michigan. You live in Michigan. For 2017 you worked in Michigan and you worked in Maine. Right?
You filed a non-resident Maine tax return. So far so good.
But as a Michigan resident, you pay tax on all of the income you earn around the country to Michigan. So, you pay tax in Michigan on the income that you earned in Maine.
Now, Michigan isn’t evil. They will give you a credit for all of the tax that you paid to Maine. You got a refund from Maine, but I still suspect that you did pay Maine some taxes, right? That tax you paid to Maine will be used to offset some of that tax that you owe to Michigan.
Here’s a link that might help: Michigan Taxes
Hi Barb,
You’re right, you shouldn’t owe Missouri for your Kansas windfall. You should only owe Kansas. Let’s see if this helps:
1. Make sure you are filing Missouri as a non-resident.
2. Make sure that you are filing Kansas as a resident.
3. Make sure that your windfall money is labeled as being earned in Kansas (this is my guess as to where the problem is.)
4. Take a look at the Missouri NR form – check to see that the only income you have in Missouri is your wages. If the windfall is showing up here, (and you’ve labeled it correctly in your software) then you may need to do a manual override to take it off of the Missouri return. I don’t like manual overrides – but sometimes, it’s necessary.
Hopefully, that should take care of it. You will have to pay tax on your windfall in Kansas – but at least you’ll be paying the right state.
This is helpful… My resident state is Michigan. I worked there and in Maine during 2017. I have a refund from Maine, filed non resident, but owe a lot of money to Michigan and unsure exactly why. This is my first year filing independently and the Michigan return shows a ‘1’ next to ‘exemptions claimed’? All of my income everywhere was taxed by Michigan and the minimal ‘Michigan tax withheld’ was taken off that number leaving a nice “you owe”. What is this “credit” I’m reading about? I’ve never owed, annoying and expensive!
I work in Missouri but had a windfall in Kansas- where I live. The program I’m using increased my balance due Missouri. Without the windfall, i get a refund of 660. With the windfall, I owe 650. How can this be right when that money shouldn’t be taxable in MO?
Hi Deanna,
Something doesn’t sound right. You live in Illinois and work in Missouri. Normally, the company should withhold Missouri and not Illinois. So that’s not jiving for me. Now, if you had no Missouri withholding, and you worked in Missouri — only owing $100 doesn’t sound right. You might want to have someone take a look at it. I can’t tell without looking, but my gut says something’s not right.
I live in Illinois and worked in Missouri last year. In looking at my W2, it seems that the company only took out taxes for Illinois, and I even had extra taken out. But while trying to start my taxes, it looks like I owe Missouri over $100 while getting almost $1700 back from Illinois. I worked in Missouri for many years previously, and always received larger tax returns from Missouri. I am worried, any advice?
Thanks Crystal! Glad I could help.
We are a Missouri corporation hiring our first Illinois employee and this article helped to answer some questions that I had on withholding payroll for the employee and his questions on what will happen come the end of the year. Thank you very much! At least we have some guidelines to get us going and our accountants can sort it out at the end of the year.
Hi Jim,
We moved to Missouri in 1995 and my husband just got his first call for jury duty 22 years later. (I on the other hand seem to be on their priority list.)
Thanks, Jan. That’s very helpful and in line with what I thought. Just wanted to check with an expert. Voter registration because we are planning on spending the rest of our lives in MO and I want to express our interests at the voting booth. Might prove tricky if I get picked for jury duty though 🙂 so maybe not.
Thanks again!
Hi Jim, Welcome to Missouri. So it looks like you’re a California resident for 2017, that’s easy. But for you, it seems that your tax home is California. So, for you, you are a California resident until you move to Missouri. Your wife is a Missouri resident. That can be a little funky on your California return if your wife works in Missouri, because California will tax her Missouri income. (This is not the normal situation, California is different from just about everybody else.)
So, if you are still living and working in California, why the Missouri voter registration? Are you transferring to Missouri? Will you be working from Missouri at all? If not, then for all intents and purposes, even if you change your legal residence to Missouri, your tax home will still be California. Tax home and real home aren’t always the same thing. But if you’re working in California and maintaining an apartment there, then California is going to claim your tax home is California.