Filing Taxes in Two States: What You Need to Know

Filing taxes is never easy, but what if you need to file taxes in more than one state?

There are a variety of reasons you might need to file taxes in multiple states: you relocated mid-year, work remotely for an out-of-state employer, maintain dual residency, or own property or a business in another state. Although the process can seem overwhelming, understanding your filing obligations can help you navigate it smoothly and avoid unnecessary tax liabilities.

The good news is that, with the right guidance, filing taxes in two states can be straightforward. At Porte Brown, our state and local tax experts can confidently help you navigate multi-state filing complexities. By understanding which forms to file and how to split your income between states, you can stay on top of your tax obligations and even find ways to save.

When Do You Need to File Taxes in Two States?

Filing multiple state tax returns is more common than you might think. Each situation has its tax obligations, and understanding them helps you stay compliant and avoid overpayment.

Since tax laws vary by state, knowing when and where to file is essential for managing your tax requirements. Expert guidance can help you navigate partial-year residency, nonresident income, or business tax filings. If you need more time, filing a tax extension can provide extra time to submit your return without penalties.

Living in One State and Working in Another

Do you live in one state but work in another? You may be required to file in both. This is common for those who commute across state lines or work remotely for an employer based in a different state. Remote workers also face unique tax challenges, as some states tax income based on where the work is performed, while others tax based on the employer’s location. 

Moving to a New State During the Tax Year

When moving during the year, you may need to file as a partial-year resident in both states. Be sure to allocate income correctly based on the time spent in each state to avoid errors and extra taxes.

Some states require a pro-rata split based on the time spent in each location, while others may tax all income earned while you were a resident. Keep clear records of your move date, earnings, and tax withholdings to help ensure accurate filings and prevent unnecessary tax burdens.

Owning Property or a Business in Another State

Owning property or a business in another state can trigger additional tax filings. Rental property owners may need to file nonresident returns, while business owners should understand their tax obligations based on their business structure and state income rules.

How to Determine Residency for Tax Purposes

Determining your residency status is paramount when filing state taxes, as it dictates where you owe taxes and how much. Each state has its own criteria for residency, typically based on factors like the number of days spent there, your primary home, and where you conduct personal and financial activities. Some states have strict tests, while others look at intent: where you vote, register your vehicle, or have professional ties.

Misclassifying your residency can lead to overpayment or underpayment, potentially resulting in penalties. If you're planning a move, consider how state tax laws, including income tax rates, residency requirements, and tax credits, will affect your tax situation. Understanding the differences between resident, nonresident, and part-year resident status ensures you're only paying what you owe when filing state taxes in two states.

Resident vs. Nonresident vs. Part-Year Resident

Your residency status affects how much of your income is taxed and by which state. Here’s how states typically classify taxpayers:

• Resident: You’re considered a full-year resident if you live in a state permanently or spend most of the year there. Residents must report all income to their home state, regardless of where it was earned.
• Nonresident: If you earn income in a state where you don’t live, you may need to file as a nonresident. This usually applies to those who commute across state lines for work or own rental property in another state.
• Part-Year Resident: If you moved between states during the year, you’re considered a part-year resident in both states. You’ll typically need to file in both, but only for the income earned while living in each state.

Dual Residency and How It Affects Your Taxes

Some people may be considered residents of two states simultaneously, known as dual residency. This can happen if you own homes in two states, split your time between them, or have personal or financial ties to both. When this happens, both states may try to tax your entire income, making filing more complicated.

To avoid double taxation, many states offer tax credits for income taxes paid to another state. However, these rules vary, and some states are more aggressive in asserting residency. If you think you may have dual residency, working with a tax professional can help you navigate how to file taxes in two states while minimizing your tax burden.

Steps to File Taxes in Multiple States

Filing taxes in 2 states can seem complicated, but breaking it down into clear steps makes the process more manageable. Whether dealing with nonresident income, a recent move, or dual residency, here’s how to stay on track with tax laws.

Gather Essential Documents and Information

Before you start filing, make sure you have all the necessary documents, including:

• W-2s and 1099s show income earned in each state.
• State-specific tax forms are required for resident and nonresident filings.
• Records of moving dates if you changed states during the tax year.
• Property ownership or business records, if applicable.
• Previous year’s tax returns for reference.
• Tax withholding information from each state where you worked.

Filing Your Resident State Return

Your resident state is typically where you live most of the year. Here’s how to file:

1. Report all income: This includes wages, freelance income, and investment earnings, regardless of where it was earned.
2. Check for tax credits: Many states offer credits to offset taxes paid to another state. Look for credits that reduce taxes owed, particularly if you’ve already paid taxes to another state on that income.
3. Use state-specific forms: Each state has unique tax forms and instructions. For example, your resident state may require a specific form for tax credits, while your nonresident state may only want income earned within its borders.
4. File this return first: Your resident state return can influence the amount of tax owed or credits available for your nonresident filing. Filing your resident return first helps you claim all credits and avoid errors in the nonresident state return.

Filing Your Nonresident State Return

You may need to file a nonresident return if you earned income in a state where you don’t live. Here’s what to do:

1. Report only the income earned in that state: Unlike your resident return, you don’t need to include out-of-state earnings.
2. Review withholding amounts: Check your W-2s or 1099s to ensure proper tax payments.
3. Check for reciprocal agreements between states: Some agreements might exempt you from filing.
4. Claim credits on your resident state return: If you’ve paid taxes in the nonresident state, you may be able to claim credits on your resident state return.

Common Challenges When Filing Taxes in Two States

Filing taxes in multiple states can be overwhelming, especially with complex rules and requirements that vary from one jurisdiction to another. Understanding common pitfalls and taking proactive steps can help you stay compliant and minimize your tax burden. Let’s explore these challenges and how to navigate them.

Avoiding Double Taxation

Double taxation occurs when both your resident state and the state where you earn income tax the same earnings. To avoid double taxation and overpayments, many states offer tax credits that let you offset taxes paid to a nonresident state. Check if your resident state provides credits to reduce the risk of double taxation.

Understanding Reciprocity Agreements

Reciprocity agreements are arrangements between two states that allow residents to work in a neighboring state without filing a nonresident tax return. Under these agreements, you only pay taxes to your state of residence, not the state where you earn income. 

Understanding whether your state has a reciprocity agreement with other states is essential. Examples of states with reciprocity agreements include:

• Illinois and Iowa 
• New Jersey and Pennsylvania
• Maryland and Virginia

Special Considerations for Businesses and Non-Profits

When operating in multiple states, businesses and non-profits face additional complexities when it comes to tax filings and compliance. Each state has its own tax rates, rules, and filing deadlines, and organizations must ensure they meet each jurisdiction's requirements. Below, you’ll find some key considerations to keep in mind for businesses and non-profits that are expanding across state lines.

Multi-State Payroll Taxes for Businesses

For employers with employees working in different states, it's important to understand the payroll tax requirements in each state. Businesses must follow each state’s rules regarding withholding, unemployment taxes, and other employment-related taxes. 

This means calculating the correct withholding for each state, tracking state-specific filing deadlines, and ensuring proper reporting. Staying on top of these obligations can help businesses avoid penalties and stay compliant.

Filing Requirements for Non-Profits Operating in Multiple States

Non-profits that operate in more than one state must adhere to different filing requirements for each state where they have a presence. This includes meeting state-level sales tax exemption requirements, charitable solicitation registration rules, and income tax filings. Each state has different rules on whether a non-profit must file for exemption or tax-exempt status and how to comply with state-specific regulations. 

If you aren’t sure about how to file taxes in multiple states, contact a non-profit accountant for help.

Expert Tips for Easier Multi-State Tax Filing

Filing multiple state tax returns can be complex, but with the right approach, you can simplify the process. Here are some expert tips to help you stay organized:

• Understand your residency status: To avoid mistakes, determine whether you’re a resident, nonresident, or part-year resident in each state.
• Report all income: Report all income, including wages earned in other states, to maintain compliance.
• Check for tax credits: Look for credits offered by your resident state to offset taxes paid to another state and avoid double taxation.
• Use state-specific forms: Each state has its forms and requirements. Make sure you use the correct ones.
• Keep detailed records: Maintain clear records of your income, deductions, and time spent in each state.

Porte Brown Can Help Simplify Your Multi-State Tax Filing

Filing taxes in two states is complex, but with the right guidance, it’s much more manageable than you might think. At Porte Brown, our team of experts is dedicated to helping you navigate how to file taxes if you lived in two states. We bring professionalism, attention to detail, and a client-first approach to every tax situation, offering you peace of mind as you tackle your tax responsibilities.

If you’re facing the challenges of multi-state filing, let Porte Brown provide the personalized support you need. Our team is here to help you streamline the process and ensure you're on the right track. Contact us for a consultation.