SBS Tax and Consulting Services
Do you know you need to file taxes in more than one state?
Updated: Dec 7, 2021
My New Jersey friends who work in New York asked why they need to file two states tax return. One for NJ, and another one for NY. The answer is simple. If you have earned income in more than one states, or live in one and work in another one, then you may need to file more than one state tax return.
Let’s learn more multi-state tax filing. However, it is important to know why you need to file multiple state return and how to do it.
Four major reasons you need to file a state tax return in more than one states.
1. You moved from one state to another state
Ex: In January 2018, you worked in New York and withhold some income taxes from your NY employer. In June 2018, you decided to quiet the Job in NY and moved to California. Immediately, you found a job in California and lived there for the rest of 2018.
In this scenario, you have to file state tax returns for NY and CA, and you need to states taxes on a prorated basis depending on how long you lived and worked in each state.
2. You live in one state but work in another state
Ex: In 2018, you live in Connecticut with your family. You work in New York, and your spouse works in Connecticut.
In this scenario, if you or your spouse (filing status as married filing jointly) work in a different state from where you reside, you have to file more than one states tax return. Generally, you don’t need to pay taxes to both states. You would need to pay to the states where you reside. Furthermore, what if you live in Connecticut and work remotely for a company headquartered in New York. In this case, you only need to file a states tax return in the state where you live and work remotely.
3. You own income-producing property in another state
Ex: In 2018, you are retired and live in Maine. You own 2 rental houses in Ohio and 1 commercial building in New Jersey. The rent that you collected your rental house and commercial building is your only source of income in 2018
In this scenario, any reportable income that you earned from an out- of state property is required to file a tax return in that states. Also, you need to report the income on the state where you live. Therefore, in this case, you will need to file 3 state tax returns. One for Ohio, one for New Jersey, and one for Maine. You might not need to pay tax in your Maine’s state tax return.
4. You are a business owner who works in multiple states
Ex: In 2018, you are a self-employed oil and gas consultant. You live in New York, but you have to fly to Taxes, California, and New Mexico for work.
In this scenario, you have to file state tax returns and pay state income taxes in multiple states. However, this scenario is different from scenario#2 which mentioned above. If you physically step in the state and work in that state, then you need to file a state tax return and pay income tax for that state. It is different from working remotely from one state to multiple states.
Non-resident state tax return V.S Resident state tax return V.S Part-year resident state tax return
The non-resident state tax return is for the taxpayer who is not living but working in that state. On this form, you will report only the income that was earned in that state. For instance, you are a consultant working on an out-of-state project, it would be the proportion of your earning while on the project, which assumes a two-month project would result in 1/6 of the annual earning being allocated to that state. This earning would then be taxed based on that particular state’s income tax brackets.
The resident state tax return is for the taxpayer’s home state. You will report all income earned, including the income earned from other states. When you complete your home state tax return through, you will be allowed to list the taxes owed to the states. This will be applied as a credit against taxes owed to the resident state, so it will lower your income tax for your home state.
The part-year resident state tax return is for the taxpayer who has moved states mid-year. By filing a part-year resident return, it allows you to split your income and be treated as a resident in two different states. However, the way you divide your income between the states depends on where you were a resident when income was earned. For instance, you made $4,000 while as a resident in New York and $12,000 as a resident in Connecticut, you would report $4,000 on your NY tax return and $12,000 on your CT tax return.
The impact of multiple states returns to your federal return
The impact is zero. Your federal income tax return is separate from your state tax returns. You report your federal return to the IRS while you report your state return to the state’s entity, such as the Department of Finance of the state. Although you may use some of the specific information found on your federal tax return on your state tax return, they are not related to each other.
I have seen a lot of taxpayers did not realize that they need to file multiple states tax returns, so they ignored it. When the state’s entity audit of their source of income, they have to pay penalty and interest for the taxes they did not report from another state. Therefore, it is important to understand why you need to file multiple state tax return and learn how to do it.