Do You Pay State Income Tax Where You Live or Where You Work?

If you live in one state and work in another, you may be subject to state income tax in your home state, the state where you work, or both, depending on each state's tax law. Generally, if you are taxed twice, you will be able to claim a credit on your home state tax return for the taxes on income that is also taxed in the state where you work.

In the state where you reside, you are normally subject to state income tax on your income from all sources, both inside and outside the state, except for income that is specifically exempt according to state law. Part year residents are normally subject to tax on their income from all sources while they are residents of a state, and only from sources within the state for the part of the year they are not residents. Nonresidents are generally subject to state income tax only on work performed in the state or income from sources within the state. So you would normally be subject to state income tax on the income you earned while working in a state, even if you reside in another state.

Generally, military personnel who are assigned to a duty station in a state but who are residents of another state are not subject to state income tax in the state where they are temporarily posted. If they have sources of income other than their military pay in that state, they may be subject to state income tax on that income.

Military personnel generally continue to be residents of the state where they resided when they entered the military service, and are subject to state income tax on all their earnings from any source, unless the income is specifically exempt by state law.

According to the Military Spouses Residency Relief Act of 2009, the spouses of military personnel who are stationed in a state that is not their state of residency only due to their spouse's military orders are not considered residents of that state and are exempt from state tax on wages and other types of personal service income they earn while in the state.

Some states have reciprocal agreements with neighboring states to avoid double taxation. When states have a reciprocal agreement and you live in one of the states and work in the other, you are subject to state income tax only in the state where you live. You can find a list of State Tax Reciprocal Agreements on the RWD Financial Support Service website.

In these states that have reciprocal agreements you can generally be exempt from state income tax withholding in the state where you work, but you may have to present an exemption form. Your employer in the state is generally not obligated to withhold tax for the state where you live. But the employer may set up an account to withhold the tax for you.

Sources:

Income Taxes If You Work Out of State, Gaebler

President Signs Military Spouses Residency Relief Act, Journal of Accountancy