Hate paying taxes? What if you have to pay twice?
Usually, rules prevent Americans from doing that, but occasionally, it can still happen. The potential for double taxation typically occurs when people live and work in different places. For example, if you choose, but aren’t required, to work in a different state from your employer.
Even if you escape double taxation, sorting through the rules can be complicated and require extra tax filings. Every state has different rules, but states generally require you to pay taxes and file a return if you’re a resident or a nonresident earning income in the state. That is unless the state has a reciprocity agreement with your home state or doesn’t levy an income tax. You may also be required to file a tax return in your employer’s state.
State taxes can be complicated, so before clinging to the work-from-anywhere lifestyle, understand what may be in store for you come tax season.
Don’t Worry About These States
States that don’t have an income tax likely won’t require you to file a state income tax return. They are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Wyoming
- Washington
What Is a Reciprocal Tax Agreement?
If you’re working in a state that has a reciprocal tax agreement with your home state, then you won’t be taxed twice. As long as you complete an exemption form for your work state and submit it to your employer, your work state shouldn’t withhold taxes from your paycheck and you’ll only have to file a return with your home state. Just make sure your employer withholds taxes for your home state “otherwise, you may get hit with underpayment penalties come tax time,” warned tax software company Intuit’s help site.
For example, if you live in Wisconsin but commute over the border to Illinois for work, you wouldn’t pay Illinois taxes or file a tax return in that state. You would have to pay only Wisconsin taxes and file its state form.
Beware, “if you don’t submit an exemption form in the nonresident state, your employer may withhold taxes for that state,” filing software company TaxSlayer said on its website. “In that case, you’ll likely need to file a nonresident return to request a refund of the taxes withheld.”
There are reciprocal agreements across 16 states and the District of Columbia, according to Tax Foundation, a nonprofit research think tank.
What if There Is No Tax Reciprocity?
If there isn’t reciprocity between the two states, some states allow you to get a credit for taxes paid in the state where you’re not living and working. To get the credit, you’d have to file an income tax return in both states. That means filing a resident state income tax form for your home state with all your income sources and a nonresident tax return with only your employment income.
Note:
- If the tax rate in the state where you will receive a credit is lower than your home state, you may still owe some residual tax.
- Receiving the credit also assumes residency, which can be tricky, warns Nathan Hagerman, partner at Taft law firm. Typically, it’s spending more than half a year in the state with the intent of making it your permanent home, such as getting your mail, getting your driver’s license or voting there, or buying a home in the state.
- Credits don’t apply to local and county taxes.
Whose Convenience Is This?
A handful of states have a “convenience of the employer rule,” which means if you’re working in a different state for your convenience (not a requirement of the company), you will owe tax in the state where your employer is based. Unless you live and work in a state with no income tax, you may get taxed twice on the same income.
Some states offer a credit that can help offset part or all the taxes you must pay to the state where your employer is. New Jersey, for example, offers a tax credit to offset state taxes its residents paid to New York because of the convenience rule while working from home.
Which States Have the ‘Convenience of the Employer Rule’?
Though the rules in each state may differ slightly, the ones to watch out for, according to Northwestern Mutual, include:
- Connecticut
- Delaware
- Nebraska
- New York
- Pennsylvania
- New Jersey
What if I Split My Time Over Many States?
Spending time in multiple states can further complicate your taxes and may require you to track the amount of time you spend in each state.
More than half of the states that have a personal income tax require employers to withhold tax from a nonresident employee’s wages beginning with the first day the nonresident employee travels to the state for business purposes, but other states allow you to work there for 30 days or more first, according to the Mobile Workforce Coalition, a group of 280 organizations to advocate for simplifying nonresident state income tax rules.
Athletes who constantly crisscross state lines to practice and play or consultants and construction workers who may spend months at a time on projects in different cities would be required to pay income tax in each state where they earn income.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday
This article originally appeared on USA TODAY: Hate paying taxes? How to make sure you don’t pay state taxes twice
Reporting by Medora Lee, USA TODAY / USA TODAY
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