March 25, 2014



After weeks or months of job seeking, you land the position of your dreams–but the job is in a different state. The location of the job is close enough so that you can commute every day rather than move, but you are still faced with the dilemma of where and how to pay state income taxes.

Where do I pay state income taxes?

The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states. However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.

States with No State Income Tax

Seven states: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming impose no income tax at all on their residents. Two more states: New Hampshire and Tennessee tax only dividend and interest income. If you work in one of these nine states, but live in one of the 41 states (plus the District of Columbia) that do impose state income taxes, you will generally pay only resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in a state that imposes state income tax, you would only pay nonresident taxes for the state where you work.

For instance, if you live in Bristol, Virginia but work in Bristol, Tennessee, you would pay Virginia resident state income taxes. Likewise, if you worked in Bristol, Virginia and lived in Bristol, Tennessee, you would pay Virginia nonresident state income taxes. Though in both cases you would only file a single state income tax return.

States with Reciprocal Agreements

What if you live in Milwaukee but you commute every day by Amtrak to Chicago? It just so happens thatWisconsin and Illinois share what is known as a reciprocal tax agreement. As a result, your employer would deduct only Wisconsin state taxes from your paycheck, and none for Illinois. Likewise, if you live in Chicago but work in Wisconsin, your employer would only deduct Illinois resident state income taxes from your paycheck. In both instances, you would only be required to file one state income tax return.

States without Reciprocal Agreements

If you are unlucky enough to work across state lines in a state with no reciprocal agreement with your resident state, (for instance, Illinois and Indiana), then you will need to file income tax returns for both states. However, you should also be able to claim a credit on your resident state income tax return for the state income tax that you paid for the nonresident state. The result is that you actually pay taxes for one state, even though you must deal with the hassle of filing returns in both states.

Please note that reciprocity is not automatic. You must file request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request, with your employer, you will continue to be taxed by both states and you will continue to be obliged to file two state income tax returns.

Filing Multi-State Income Tax Returns

Many people who are faced with the dilemma of working in one state and living in another delegate the task of filing state income tax returns to an accountant or to a tax attorney. Still, know that many online and home-based tax preparation software programs include state income tax forms with detailed instructions on how to fill multi-state tax returns. If your tax situation is otherwise straightforward, you can save yourself a considerable amount of money by using a software program that includes both state and federal income tax forms and filing your own income tax returns.