It is common for someone to live in one state and have employment in another state. In this case, one might need to file a nonresident tax return if they have earnings in a state they do not reside in, alongside a resident tax return with your home state.
Some states, however, have exceptions to this rule, and the rule prevents you from being taxed twice on a single income.
Tax Situation between Reciprocal States
There are states with reciprocity agreements that permits a resident of other states to work there without submitting a nonresident tax. This is a norm between neighbouring states in which citizens simply need to cross a line to get to work.
In some cases, one might not file a tax return in nonresident states if the resident states with the working states have reciprocity. Such an agreement, however, only takes care of the earned income. To report and to pay taxes on unearned income might require a tax return.
It is essential to file a tax return where you work even if you don't have to pay taxes there for you to qualify for a refund if your employer withholds taxes in error from your payment, even with the reciprocity agreement.
States Having Reciprocity Agreements
As of 2020, sixteen states alongside the District of Columbia have a reciprocity agreement with other states. They are not resident states, but classified as work states. Such states are Iowa, Illinois, Arizona, Indiana, Iowa, Kentucky, Maryland, Minnesota, Pennsylvania, Montana, Michigan, Ohio, Virginia, New Jersey, District of Columbia, Wisconsin, West Virginia, and North Dakota.
Such agreements do change at times, which makes it essential to access the state tax authority in the nonresident state to be sure of the filing obligation.
States That Have No Income tax
There are nine states with no income tax on their earned income as of 2020. With this, any employer located in any of them will not need to withhold taxes for the state, provided it is your place of work. The states are Nevada, Florida, Texas, Alaska, South Dakota, New Hampshire, Tennessee, Wyoming, and Washington.
Reporting this income on the state income and federal tax return is not compulsory.
When Should You File a Nonresident Return?
It is essential to file a nonresident return if you earned income in a state where you aren't a resident as long as there is no reciprocity between the state and yours.
One also needs to file a tax return if the necessary paperwork was not filed with the employer to relieve you from withholding. A reciprocity agreement has provisions that are not automatic as one needs to submit forms specific to the state to make sure that the taxes for the work state will not be withheld from your payment.
Your employer will have to withhold some taxes for your residence state where you live, or the outcome might not be pleasant. One might owe the state some money when the taxes are due.
Taxable Non-employment Income
It is not compulsory to work in a state before you can owe taxes there as most states tax all income types that come from them. Other taxable income to a nonresident are:
Income from a service you performed in a state. For instance, a self-employed gardener who travels to various states to mow the lawn in another state. Such a person will file a nonresident return in the state where the mowing was done.
Gambling and lottery winnings are taxable in the state where the winner won, making it essential to file the return there.
Revenues from a property Sale: You need a nonresident tax if the location of the property is in a place not in your original home state.
Every business, profession, and occupation you had in a state requires you to file a nonresident tax return.
One might not need to pay taxes on the interest income to the state if the person has a bank account in the state if there is an interest and it's not your residence. It is unnecessary to make a claim and pay your taxes on the home and federal state tax return.
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