Do You Have To File a Nonresident State Tax Return?

It's more common than you might think for someone to live in one state while being employed in another. You might have to file a nonresident tax return if you've earned money in a state where you don't live, as well as a resident tax return with your home state. But some states offer exceptions from this rule, and the federal government won't let you be taxed on the same income twice.

Tax Agreements Between States

Some states have reciprocity agreements in place that allow residents of other states to work there without having to file nonresident state tax returns. This is most common among neighboring states where crossing over the line to go to work is a common practice.

You won't have to file a return in the nonresident state if your resident state and the state in which you're working have reciprocity. But these agreements cover only earned income—what you collect from employment. Reporting and paying taxes on unearned income might still require filing a tax return.

Earned income is any income you receive in exchange for services you provide as an employee. It includes wages, salaries, commissions, bonuses, and tips.

States With Reciprocity Agreements

Sixteen states and the District of Columbia have reciprocity with one or more other states. These are work states, not residence states:

• Arizona
• District of Columbia
• Illinois
• Indiana
• Iowa
• Kentucky
• Maryland
• Michigan
• Minnesota
• Montana
• New Jersey
• North Dakota
• Ohio
• Pennsylvania
• Virginia
• West Virginia
• Wisconsin

States With No Income Tax

Eight states don't impose any income tax on earned income at all. An employer located in one of them would not withhold taxes for that state if you work there. These states are:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming
  

New Hampshire and Washington don't take your payroll income, but you may owe money if you make money on interest or dividends.

Will You Pay Taxes Twice?

You shouldn't have to pay state taxes twice on the same income, even if you work in a state that doesn't have reciprocity with your home state. The U.S. Supreme Court ruled in 2015 in Comptroller of the Treasury of Maryland v. Wynne that states cannot tax the income of residents earned out of state if they impose a tax on nonresident earnings in the state.

The change cost some states a great deal of tax revenue, and the decision didn't come lightly. Justices debated and listened to oral arguments for over six months before they narrowly voted 5-4 that states must exempt from taxation earnings that were taxed elsewhere.

The 2015 Supreme Court ruling mandates that states must include some mechanism in their tax codes that would prevent the same income from being taxed twice in states that tax the income of residents not earned within the state and the income of nonresidents earned in the state.

You'll still have to file a nonresident return in your work state if there's no reciprocity. But no tax will be due under this landmark decision. Your home state should offer you a tax credit for any taxes you paid to other states.

When You Must File a Nonresident Return

You must file a nonresident return if you worked or earned income in a state where you're not a resident if that state doesn't have reciprocity with your home state.

You would also have to file a return there if you didn't file the correct paperwork with your employer to exempt you from withholding. The provisions of a reciprocity agreement don't happen automatically. You must submit a state-specific form to your employer to ensure that taxes for your work state aren't withheld from your pay there. You'd have to file a nonresident return if you fail to do so. It would be the only way you could have those taxes refunded to you.

Taxable Non-Employment Income

You don't have to work in a state to owe taxes there. Most states tax all types of income that are sourced to them. Other types of income that can be taxable to a nonresident include:

• Income as a partner in an LLC, partnership, or S-corporation: Your share as a partner can be taxable in the state where the company is based. But this rule does not apply if you're simply an employee of the company.
• Income from services performed within the state: A self-employed appliance repair person who travels across state lines to repair an oven in someone's home should file a nonresident return in the oven owner's state.
• Lottery or gambling winnings: These are taxable in the state where you won, so you'd have to file a return there.
• Income from the sale of property: This requires a nonresident tax return when the property is located somewhere other than your home state, as does rental income earned there.
• Carrying on a business, trade, profession, or occupation in a state: You'd have to file a nonresident return if you worked as a consultant or contractor in another state.

You do not have to pay taxes on interest income to that state if you maintain a bank account in a state where you don't live and that money earns interest. You do have to claim it and pay taxes on it on your federal and home state tax returns, however.

Frequently Asked Questions (FAQs)