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Navigating Tax Filings When Living in Two States

ByWallstreet Observer

This guide explains how to handle tax filings when you have connections to two states, a situation that can arise from working remotely, owning property in multiple locations, or having recently moved. Understanding the rules is crucial to avoid penalties and ensure you’re paying taxes correctly.

Quick answer

  • Determine your domicile (legal residence) to know which state is your primary tax home.
  • You will likely file a resident return in your domicile state and a non-resident return in the other state.
  • File a part-year resident return if you moved during the tax year.
  • Claim credits for taxes paid to the other state to avoid double taxation.
  • Keep meticulous records of income, expenses, and time spent in each state.
  • Consult a tax professional if your situation is complex.

What to check first (before you file or change withholding)

Before you begin your tax filing process for a dual-state situation, several key areas need careful consideration. Getting these right upfront can prevent significant headaches later.

Filing Status

Your filing status (Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Widow(er)) is determined by your marital status and responsibilities as of December 31st of the tax year. This status impacts your tax bracket, standard deduction, and eligibility for certain credits. In a dual-state scenario, your filing status generally remains consistent across state filings, but it’s essential to confirm this with each state’s tax authority if you have any doubts.

Income Sources

Identify all sources of income earned during the tax year. This includes wages, salaries, tips, self-employment income, investment income (dividends, interest, capital gains), rental income, and any other taxable earnings. For dual-state situations, it’s critical to track where each income was earned. For example, if you work remotely for a company based in State A but live in State B, your income might be taxable by both states, depending on their specific rules regarding remote work and nexus.

Withholding or Estimated Payments

Review your W-2s and 1099s to ensure the correct amount of tax has been withheld from your paychecks. If you have income not subject to withholding (like self-employment or freelance income), you may need to make estimated tax payments to the IRS and potentially to one or both states. In a dual-state scenario, you might need to adjust your withholding with your employer or make estimated payments to the state where you are considered a non-resident if that state requires it. Check the official source or your provider for specific guidance on state withholding requirements.

Deductions and Credits

Understand which deductions and credits you are eligible for at the federal and state levels. Common deductions include those for student loan interest, IRA contributions, and self-employment taxes. Credits can reduce your tax liability dollar-for-dollar, such as the Child Tax Credit or education credits. When filing in two states, you may be able to claim deductions or credits related to income earned or expenses incurred in the non-domiciliary state. Crucially, most states offer a credit for taxes paid to another state on the same income, which is vital to prevent double taxation.

Deadlines and Extensions (General)

The federal tax filing deadline is typically April 15th each year. If this date falls on a weekend or holiday, it shifts to the next business day. States generally align with this deadline, but some may have slightly different dates. If you cannot file by the deadline, you can request an extension, which usually grants you an additional six months to file. However, any tax liability is still due by the original deadline. For dual-state filers, be mindful of potential differences in state deadlines or extension procedures.

Step-by-step (simple workflow)

This workflow outlines a general approach to filing taxes when you have connections to two states.

1. Determine your Domicile:

  • What to do: Identify your legal residence, the state you consider your permanent home and intend to return to. This is your domicile.
  • What “good” looks like: You can clearly articulate why one state is your domicile over the other based on factors like where you vote, own property, have a driver’s license, and spend most of your time.
  • Common mistake: Confusing domicile with where you spend most of your time or where you earn income. This can lead to filing in the wrong state as a resident.
  • How to avoid it: Review the domicile tests provided by your state’s tax authority.

2. Gather All Income Documentation:

  • What to do: Collect W-2s, 1099s (for freelance, interest, dividends, etc.), K-1s, and any other statements detailing your income for the entire tax year.
  • What “good” looks like: You have a complete list of all income sources and the corresponding documentation.
  • Common mistake: Missing income from a secondary job or side hustle, or forgetting about investment income.
  • How to avoid it: Create a checklist of all potential income types and cross-reference it with your bank statements and brokerage accounts.

3. Track Time Spent in Each State:

  • What to do: Document the number of days you physically worked or resided in each state. This is crucial for determining non-resident tax obligations.
  • What “good” looks like: You have a clear record, perhaps a log or calendar, showing your days spent in each state.
  • Common mistake: Inaccurate or incomplete time tracking, which can lead to incorrect apportionment of income.
  • How to avoid it: Use a simple spreadsheet or a dedicated app to log your days spent in each state throughout the year.

4. Identify Your Filing Status:

  • What to do: Determine your correct federal filing status (e.g., Single, Married Filing Jointly).
  • What “good” looks like: You’ve selected the filing status that provides the most tax benefit and accurately reflects your circumstances as of December 31st.
  • Common mistake: Using an incorrect filing status, which can result in paying more tax than necessary or facing penalties.
  • How to avoid it: Review IRS guidelines on filing statuses.

5. Determine Your State Residency Status:

  • What to do: Based on your domicile and time spent, determine if you are a resident, non-resident, or part-year resident for each state.
  • What “good” looks like: You’ve correctly identified your status for both states according to their specific rules.
  • Common mistake: Assuming you are a resident of both states or neither, leading to incorrect filings.
  • How to avoid it: Consult each state’s tax agency website for their residency definitions.

6. File Your Resident State Return:

  • What to do: File as a resident in your state of domicile. Report all your income earned worldwide.
  • What “good” looks like: Your resident state return accurately reflects all your income and claims applicable deductions and credits.
  • Common mistake: Only reporting income earned within your resident state, forgetting income earned elsewhere.
  • How to avoid it: Ensure you report all income, then claim credits for taxes paid to other states.

7. File Your Non-Resident State Return (If Applicable):

  • What to do: If you earned income in a state where you are not a resident, you’ll likely need to file a non-resident return there. Report only the income earned in that state.
  • What “good” looks like: Your non-resident return accurately reports only the income sourced to that state.
  • Common mistake: Reporting all your income on the non-resident return instead of just the income earned in that state.
  • How to avoid it: Use state-specific forms and instructions for non-resident filings.

8. File a Part-Year Resident Return (If You Moved):

  • What to do: If you moved during the tax year and changed your domicile, file a part-year resident return in your former state and a resident return in your new state.
  • What “good” looks like: You’ve accurately reported income earned while a resident of the former state and income earned after becoming a resident of the new state.
  • Common mistake: Filing as a full-year resident in one state and ignoring the residency period in the other.
  • How to avoid it: Use the specific part-year resident forms provided by the state(s).

9. Claim Credits for Taxes Paid:

  • What to do: On your resident state return, claim a credit for income taxes paid to the non-resident state on income also taxed by your resident state.
  • What “good” looks like: You’ve successfully avoided double taxation by claiming this credit.
  • Common mistake: Forgetting to claim the credit for taxes paid to another state.
  • How to avoid it: Refer to your resident state’s tax forms and instructions for claiming out-of-state tax credits.

10. Review and Submit:

  • What to do: Double-check all calculations, ensure all required forms are attached, and submit your federal and state returns by the deadline.
  • What “good” looks like: Your returns are accurate, complete, and filed on time.
  • Common mistake: Typos or mathematical errors, or missing required documentation.
  • How to avoid it: Use tax software, have a friend review your return, or consider professional help.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes | Fix

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