Thursday, June 19, 2008

Working or Living in Two or More states

If you work in two different states, you will file tax return in both the states. One state is your tax home white the other state is where you are part year resident. In some cases, you may be part year resident of two or more states.

In the state that is not your tax home, where you are part year resident, report income you earned while in that state. If you have received only one W2 from your employer, then use simple arithmetic based on number of days spent in the state to figure our the income that you should report to this state.

In the state that is your tax home, report your worldwide income for full year. Also in this state claim credit for the taxes paid to the other state.

State with no income tax. The states that do not have individual income taxes are Florida, Alaska, Nevada, South Dakota, Washington, Texas and Wyoming. In New Hampshire you only pay income tax on Dividend and Interest income at flat rate of 5%. Tennessee does have tax on income (at a 6% rate) received from stocks and bonds not taxed ad valorem.

Florida, Alaska and South Dakota have corporate income tax. Washington has a corporate tax called the "Business and Occupation Tax (B&O)", which is a gross receipts tax. Texas in May 2006, passed a franchise tax on businesses (sole proprietorships and some partnerships are exempt).

States with a flat rate personal income tax. Most states (34) have a progressive income tax, where the rate rises as an income gets larger. Following states have flat rate income tax: Colorado 4.63%, Illinois 3%, Indiana 3.4%, Massachusetts 5.3%, Michigan 4.35%, Pennsylvania 3.07% and Utah 5%.

Moving After Retirement. If you are getting retirement benefits and you moved from a state with no income tax to a state with income tax, then you must pay state income tax even on your retirment benefits.

Nonresident Aliens and Exempt Individuals. States define tax residence differently than the IRS does at the federal level. At the state level, there are generally three types of people: residents, part-year residents and nonresidents. The determination of residence tends to be based on the time of year an individual moved into or out of a state, or if they lived there all year. It is entirely possible that an nonresident alien is considered a resident for tax purposes at the state level several years before they are considered a resident for federal tax purposes.

Some states honor the federal tax treaty benefits. States the do not honor federal treaty benefits are Alabama, Arkansas, California, Connecticut, Hawaii, Kansas, Kentucky, Mississippi, New Jersey, North Dakota and Pennsylvania.

Members of Armed Forces. The service pay of members of the armed forces is taxable only by the state of their legal residence, regardless of where they may be stationed in the line of duty.

Situation 1: Living in one state while commuting daily to work in another state.
It may happen that you live in one state while you go to work in a different state. A common example is you live in New Jersey and work in New York. You commute daily from NJ to NY. For NY you are nonresident and NJ is your tax home. You must file NY tax return as nonresident and report income earned while in NY. You must file NJ return as full year resident and report your world wide income for the year including NY income. On the NJ return, claim credit for taxes paid to NY.

Situation 2: Working and living in a state while the employer is in a different state For example, you live and work in California while the employer is in New Jersey. You must file CA tax return and report all your income including the income received from the NJ employer. Your income is not subject to NJ state taxes. If the employer is withholding NJ state taxes, tell them not to withhold NJ taxes. In case, on your W2, NJ taxes are withheld, then you will file NJ return to get the refund of taxes withheld. File nonresident tax return (Form NJ-1040NR), and list the NJ income as zero , which results in zero NJ tax and the return will show the refund. With your NJ tax return you will attach a statement that you were never present in NJ for this employment. If possible get a statement from the employer that you worked from California.

Situation 3: Moving out of a state to another state
For example, you were living and working in CA, and then in the same year you moved to NJ and started working from NJ.

Now during the period you are in NJ, you will report income on the NJ tax return. You may need to report this income on the CA tax return also if your moving out of CA is considered temporary or transitory. This is especially true if you are domiciled in CA or were resident of CA. If you must report the NJ income on the CA tax return, then on the CA tax return you will also claim credit for taxes paid to NJ.

If you moved out of CA permanently (and did not leave any links with CA), you will not report your NJ income on CA tax return. If you moved out of CA permanently but you returned back to CA after one or two years, then CA will certainly like to tax you for the period you were out of CA. Now it is for you to prove that stay outside was not temporary or transitory.

Situation 4. Moving out the U.S. to a foreign country
If you are a U.S. citizen or permanent resident, you must file the U.S. tax return and report your worldwide income. If you paid any taxes in the foreign country, then you get foreign tax credit by filing Form 1116 or you can use earned income exclusion Form 2555 if you meet the requirements.

Your foreign income may be taxable in the state you are domiciled or were resident when you left the country. And on the state tax return, you do not get foreign tax credit or foreign earned income exclusion. If your foreign income is taxable in a state depends upon your situation. For this you must read the state’s residency requirements. If your stay out of state is considered temporary or transitory, then many states in the U.S. will certainly tax you.

Situation 5. Married Working and Living in Different States
If you are married, then normally it is better tax wise to file joint return. And if you file joint for the federal return, then most states require that you file state in the same way. If both the spouses work and live in the same state, then the state return is simple. In many cases, both the spouses live and work in different states.

For example, one spouse lives and works in MN and other spouse lives and works in NJ and they are filing a joint return. For the MN tax return, one spouse is resident of MN and must declare his/her worldwide income to MN while the other spouse is nonresident of MN and does not have any MN income. Similarly, for the NJ tax return, one spouse is resident of NJ and must declare his/her worldwide income to NJ while the other spouse is nonresident of NJ and does not have any NJ income.

State Tax FormsTax Administrator has a map that has links to all the state's tax information web sites.

Where is My Refund?
California. Please wait 7 days after you e-file. If you filed on paper, please allow 8 weeks for processing of your return. Before you begin, make sure you have: Your social security number, your complete mailing address, and the refund amount shown on your tax return. Check here

North Carolina. To determine the status of your refund for the current tax year 2007, you will need: The first social security number shown on the return and the exact amount of refund shown on your return (D-400 Line 28). Click the link:

More Articles:Your Filing Status
1. Filing Status for Married
2. Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
2. 2009 Filing Requirements
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent Contractor
3. Filing W4 Employee’s Withholding Allowance Certificate
4. Missing W2, 1099-Misc, 1099-R, 1099-Int
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Exemptions and Deductions
1. Moving Expenses
2. Itemized deductions
3. Student Loan Interest Deductions
Income Adjustment
1. Traditional IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
U.S. Gift tax and Inheritance Tax
The U.S. Gift Tax
Tax on Inheritances
Sale of Your Home
Profit from the Sale of Your Home
Foreclosure or Repossession of Main Home
3. First-Time Homebuyer Credit
State Tax Return
1. Working in Two or More States
What's New for 2009
What's New for 2009

Complete List of Articles

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1 comment:

Anonymous said...

I live in NJ and work in NY. My wife lives and works in PA. In your #5 example, you stated that NJ require me to file jointly yet my wife has no NJ income. Do I file jointly without putting my wife's income? Or file as married separately?