Filing Taxes in Two States

Some of us are lucky enough to be an official resident of one state but getting an official paycheck in another state. This can happen if you're an out-of-state college student working a part-time job, if you have a summer job in a different state, or if you moved during the year. Here's some tips to help you sort out your taxes.

First, make sure you have to file. If you only have a part-time job and are a dependent, you may not have to. Check the federal requirements and the requirements for both states. You might end up filing in one state but not another.

Still have to file? The next thing to do is gather all your W-2s, scholarship information, and any other financial documents indicating your income. Make sure you have everything. One year, I had 3 W-2s because I'd worked during the winter break the previous year, had a different job during the school year, then worked in a new place during the summer. Two of the three jobs were in one state, one was in another. Confusing, but manageable. Before you start on any forms, get out some paper and go through all of your income and potential adjustments. Assign them to one state or another. Using my example:

North Carolina
$200 Hardee's (winter break)

Georgia
$150 Admissions Office (spring)
$3000 Lindamood-Bell (summer)

Subtotals: NC- $200, GA- $3150

Grand Total: $3350

At this point, you can divide each state's income by the grand total to find the percentage of your income earned in each state. The percentage for North Carolina is 7% while the percentage for Georgia is 93%.

The important thing to remember isthat for most states all the income you earn is taxable to the state in which you are a resident. As a resident of North Carolina, all $3350 of my income is taxable to the state of North Carolina. Unfortunately, since you can't tell another state to take taxes out of your paycheck in one state, I will end up paying North Carolina money. The good news is there are tax credits (more about that later).

The second important thing to remember is that the state you work in only has a claim to the money you made in that state. Since they probably already took the money out, you may not end up paying anything extra.

What if you're a part-year resident? Things get more confusing. You'll have to know when you officially became a resident of another state. It may help to get a calendar and divide your income by month, then by state. For instance, if I had become an official resident of Georgia in the middle of the summer, my calendar may look like this:

January-February $200 Hardee's
March-April $150 Admissions
May-June $1500 LBLP
(move to GA)
July-August $1500 LBLP

Since I moved, only my income up until the end of June is taxable to North Carolina. Check both of your states' residency and filing requirements if you are a part-year resident. Not sure whether you are? If you are an out-of-state college student using your parents' address as your permanent address, then you are probably a non-resident of the state you're going to college in. If you live off-campus, though, or are supporting yourself, you may qualify as a resident of your state. If your financial aid gives you in-state residency, problem solved! (unless you moved during the year). Again, check each state's requirements.

The next part is easy, depending on how much you like giving your money to the federal government: fill out your federal tax return. This will solve early problems about whether or not you're a dependent, what deductions you plan on taking, and so on.

Now it's time to tackle those state tax returns! Always start with drafts, but make sure you use a copy of the actual form, not just a sheet of notebook paper.

The easiest form to fill out will be the one for the state in which you are a resident. If you're a part-year resident, um, pick the state with the lower income tax-you'll feel better.

For your "resident state" tax form, you report all of the income you earned while a resident. In North Carolina, this form is called D-400TC. It requires you having already filled out your second tax form, so now's a good time to do that.

For your "working state" tax form, read the directions carefully. Georgia calls for filers to skip an entire section on the regular form and fill out a worksheet (Schedule 3) instead. Forms will vary for each state, but this is the basic idea. There will be three columns for you to list your income and adjustments:

Total income (A) Income for another state (B) Income for Georgia (C)

Good thing you've already figured this out, right? You'll add or subtract adjustments for each column to figure out your adjusted gross income. Finally, you will divide your "working state" income by your total income, or C ÷ A. This is will give you a number less than one that is the percentage of your income that Georgia can tax. In other words, the same thing you did earlier!

The fun part is what you get to do with that percentage. On Georgia's Schedule 3, you figure out your standard deduction, then multiply it by the percentage. Since your "working state" can only tax part of your income, you only get part of a deduction. Finally, you will subtract the deduction from your "working state" income (not your total income) to determine your "working state" taxable income. Now you can return to the ordinary part of the tax form and determine your tax.

Almost done! Now that you know how much tax you're paying to your "working state," you can try to claim a credit for that in your "resident state." For most states, you will have to attach a copy of your "working state" return and a receipt or W-2 to prove that you actually paid taxes to another state.

Like I said, the North Carolina form is D-400TC. It asks you to list how much income you received total, and how much you paid taxes on in another state. Does the formula look familiar? You may end up using the same percentage as before, just applied to a different number. For NC, the credit is the lesser of: (1) your NC tax multiplied by the ratio from before, or (2) how much you paid to another state. After all, they don't want to give you back more than you actually paid. Unfortunately, since North Carolina has twice the tax rate of Georgia, my credit was only about half of my total tax. Such is life.

Note that you may have to pay attention to what's called net tax: This is how much you paid in taxes throughout the year minus any refunds. So you only get back what you were supposed to pay, not what you overpaid.

Fill in the credit in the right line and finish up your "resident state" tax return. Once finished, leave your draft forms aside for a few days. Come back, check for errors, then copy the forms to your official income tax forms. Congratulations on learning how to file in two states!