Multiple States - Figuring What's Owed When You Live and Work in More Than One State
Residents pay tax on all of the income (from all sources) they received during the calendar year. Residents get a tax credit for taxes paid to any other states.
Example: A California resident receives $20,000 from a rental building in Arkansas. The resident reports only the $20,000 to Arkansas and pays $2,000 in tax to Arkansas. Since the person is a California resident, California also taxes the $20,000, but gives a $2,000 tax credit for the tax you paid to Arkansas.
Part-year residents follow each state's rules. Some states separate the income, and tax only their state's income. Or a state may calculate the tax on all income as if you were a resident, and then allocate the tax based on "in state sources/all sources."
Regardless of whether you're a part-year resident or a nonresident in the state where you are working, you will probably need to complete an apportionment schedule. This form can usually be found in the state's part-year or nonresident income tax return. You use the schedule to "apportion" how much of your income is taxable in each state.
- Part-year residents not only pay tax on income earned from work performed in the state, but also pay tax on all other income received while residing in the state.
- Nonresidents generally only pay tax on income they earned from work performed in the state, and on income received from other sources within the state.
After you use the apportionment schedule to allocate the appropriate amount of your income and deductions to the new state, you need to calculate what percentage of your total income is state income. We'll call this the "apportionment percentage," and it is used in the rest of the calculations.
For example, if your total income was $50,000 and you earned $30,000 in a second state where you moved during the year, your apportionment percentage is 30,000 divided by 50,000, or 60 percent.
You generally use the apportionment percentage in one of two common methods to calculate your state income tax.
Some states require you to calculate your tax as if you were a resident in the state for the entire year. In other words, you determine your state's taxable income as if you were a full-year resident and calculate a full year's state tax on this taxable income. You then apply the apportionment percentage to this tax to determine the tax you owe in the new state.
Other states require you to prorate your itemized deductions, personal exemptions and certain other allowable deductions and credits using your apportionment percentage, so the taxes you pay to the new state are based on this prorated amount.
As a nonresident, you still have to use an apportionment schedule to determine how much tax you owe in each state, but the interesting twist here is that you also pay tax on all of your income for the entire year to your resident state. Why do the apportionment schedule, then? Because you pay taxes on what you earned in the temporary state in addition to what you pay to your resident state.
Does this sound like double taxation? It is, except that most states usually allow a credit on your resident return for the taxes you paid to the other (nonresident) state. This usually means that you won't pay any more tax than you would if you didn't have to complete the temporary state's return. But if your nonresident state has higher taxes than your resident state, you might end up paying more in total taxes because your resident state won't allow you a full credit.
Also, if you have enough deductions to significantly reduce your taxes for your resident state, but don't have any of those deductions for your temporary state, you might have to pay higher taxes overall. If this is the case, you won't have enough resident state taxes to use the full credit from the nonresident state, and you can't carry over the excess nonresident taxes to use as a credit in a later year.
You may have to file more than one state income tax return if you have income from, or business interests in, other states. Here are some examples:
- You are an S corporation shareholder and the corporation does most of its business in a state other than the state where you live.
- You're a partner in an out-of-state partnership.
- You own rental property in another state.
- You're the beneficiary of a trust or estate that has interests in another state.
Fortunately, in most cases your resident state allows you to take a credit for the taxes you have to pay to the other state, as in a temporary residence situation. Check your state tax website for information on whether your state offers this credit. TurboTax can also help you figure out the credit.