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Two or More States

If you work in two different states, you will file a tax return in both the states. One state is your Home Tax State with the other state being where you were/are a  part year resident. Or as I get a lot of  here in Kansas City, You live in one state and work in another. In some cases, you may have even more states.  

 Last year I had a client (new) that lived in one state and worked in five states.   

  • (Interestingly enough that particular client had one W-2 and the employer withheld for all five states – Self-filers, would you know how to work that out?)

In the state that is not your tax home, you are part year resident or a non-resident; you report income you earned while in that state, to that state. If you have received only one W-2 from your employer, then use simple arithmetic based on number of days spent in the state to figure out the income that you should report to that state.   

  • (Of course, that in itself brings up a really interesting taxing issue. You paid your home state taxes that should have gone to the other.)
In the state that is your tax home, report your worldwide income for the full year. Also in this state, claim credit for the taxes paid to the other state/s. Hopefully, you did this or your employer did it through withholdings.
   
States with no income tax 
 
The states that do not have individual income taxes are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In New Hampshire, you only pay income tax on Dividend and Interest income at flat rate of 5%. Tennessee does have tax on income (at a 6% rate) received from stocks and bonds not taxed ad valorem.
   
Alaska, Florida, and South Dakota have corporate income tax. Washington has a corporate tax called the “Business and Occupation Tax (B&O)”, which is a gross receipts tax. Texas has a franchise tax on businesses (sole proprietorships and some partnerships are exempt). 
 
States with a flat rate personal income tax 
Most states (34) have a progressive income tax, where the rate rises as an income gets larger. The following states have flat rate income tax:    

  • Colorado - 4.63% 
  • Illinois – 3% 
  • Indiana – 3.4% 
  • Massachusetts – 5.3% 
  • Michigan – 4.35% 
  • Pennsylvania - 3.07% 
  • Utah – 5%. 

(The above rates may have changed) 

 Moving After Retirement 

If you are getting retirement benefits and you move/d from a state with no income tax to a state with income tax, then you must pay state income tax even on your retirement benefits.

 Non-resident Aliens and Exempt Individuals  

States define tax residence differently than the IRS does at the federal level. At the state level, there are generally three types of people:   

  • Residents,
  • Part-year residents and
  • Non-residents

The determination of residence tends to be based on the time of year an individual moved into or out of a state, or if they lived there all year. It is entirely possible that a non-resident alien is considered a resident for tax purposes at the state level several years before they are considered a resident for federal tax purposes.   

Some states honor the federal tax treaty benefits. States the do not honor federal treaty benefits are Alabama, Arkansas, California, Connecticut, Hawaii, Kansas, Kentucky, Mississippi, New Jersey, North Dakota and Pennsylvania.  

It has been my experiences that if a taxpayer has a tax year where they need to file in more than one state, it is best if you visit with a tax professional to be sure you have all the information you need to file all the returns correctly. Of course, I recommend that any tax payer filing their own return visit with a tax professional to talk over their situation. Your situation might not have changed but the rules almost assuredly have. 

© 2010, Bruce McFarland. All rights reserved.

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2 Comments

  1. July 6, 2010    

    Wow, I would so not want to live in one state and work in 5 states. Just the thought of potentially having to file 6 state tax returns (assuming they all collect tax) would be enough to deter me. Unless I got paid an awful lot, that is ;)

  2. July 7, 2010    

    A lot of people feel the same way. I know I’d never want to have to go through that personally.

  1. IRS Tax Help Blog from Missouri “TaxGuy” Offers Resources for Tax Preparation and Personal Finances | Tax Attorney and Tax Resolution Services: IRS Help Blog on July 9, 2010 at 3:43 pm

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