Paying state income taxes is never easy, but what if you work in one state and live in another? If you're filing state taxes for 2 states, this is all you need to know to get the most out of your filing.
- You mostly owe state income taxes for the state where you live. So when you're filing state income taxes for 2 states, you'll end up deducting what you owe from the state where you live from your taxes in the state where you work.
- This doesn't mean you won't owe taxes in two states. For example, let's say you live in a state with a 4% income tax, and work in a state with a 5% income tax, and that you earn $50,000 in a year. You would owe $2500 where you work and $2000 where you live. But the where-you-work state would accept a $2000 deduction, so you'd end up paying them $500, and paying $2000 to the state where you live. In other words, when you're filing state taxes for 2 states, you will pay at most what you would owe if you lived and worked in the highest-tax state.
- Ask your payroll department for help early on. If you don't, you might end up withholding all the taxes for two states, and only getting the money back once you file state taxes for 2 states. They'll be able to set up your paycheck so you're withholding the right amount: you'll get the right amount of take-home pay, and won't get walloped with extra fines for under-withholding.
- Work with a tax preparation company just to be sure. The actual process for filing state taxes for 2 states involves filing as a nonresindent in one and a resident in another. It's a little tricky, but can be made much easier if you just file online with a company that can help with filing 2 state taxes. The process for filing state taxes for 2 states is also a good time to see if there are any state-specific deductions you can take.
That's the process, in a nutshell. Oddly enough, this is a lot easier than it could be! Filing state income taxes for 2 states is only possible because the states set up deals with one another: each state makes other state income taxes deductible, so they don't end up double-taxing people who live on the border of two states. So even though there's some extra paperwork (or a few extra clicks!) around tax time, people filing state taxes for 2 states can still count their blessings.