Did You Owe Taxes in Two States This Season? We Explain Why

Tax Planning

For the longest time, I thought I only had to pay taxes based on where I lived. If I spent the whole year in Maryland, I’d only owe Maryland taxes, right? Wrong. If you thought the same thing, you aren’t alone. It’s a common misconception, but today we’re going to explain why you might owe state taxes in multiple states.

There are 50 states in our great union and 43 of them impose state income taxes. That means that depending on your income earning circumstances, you could owe income tax in two or more states. We’ll start with the most obvious reasons, and then move to a couple others.

You Lived in Two States During the Year

If you live in more than one state during the tax year, and each has its own income tax, you will have to pay state income tax in both states. This is a common occurrence when you live in one state then move to another in the same year.

You’ll normally file a part-year return for each state you lived in during the year, assuming the state(s) collect income tax.

You Live in One State But Work in Another

This is a very common situation for people who live near state borders, particularly where there’s a large city just over the state line. If you live in one state, and work in another, and both impose an income tax, then you will owe tax in both states!

Fortunately, some states have reciprocal arrangements. For example, the state where you work may concede the income tax liability to the state where you live. The state where you live will have similar consideration for those who work in your state but live in another.

But owing taxes in both states is the more common situation. What usually happens is that one state will grant a credit for the other state’s income tax so you won’t pay tax on the same income twice.

Those are the two most common reasons why you owe taxes in two states. But there are a couple of other reasons.

You Traveled to and Worked in a Different State

You may have heard of this situation as it relates to professional athletes, who play games in multiple states, and entertainers, who perform in multiple arenas. States are increasingly taxing people who earn any revenue within their borders. Some states base the tax liability on the amount of time that you spend in their state earning money. The threshold varies but could be triggered in as many as 60 days.

Some states have what is known as a “first day” rule, which means that the tax liability begins on day one of your income earning activity in that state. Translated, that means that any income that you earn in that state will be subject to that state’s income tax. Some other states use a dollar threshold instead. That threshold can be triggered for as little as $300 in income earned in the state.

This tax liability may apply to business travelers. If you live in one state, but your employer sends you to assignments in 10 other states during the course of the year, you may end up owing income tax in several of those states. It will all depend upon the threshold rules in each of the states that you travel to for work.

You Have Business Interests in Another State

Sometimes you don’t even have to work in another state in order to incur a tax liability. All that needs to happen is for you to have some form of income that originates from that state. Here are some examples of when that can happen:

  • You own rental property in another state.
  • You own a profit generating farm in another state.
  • You have an interest in a partnership or an S corporation located in another state.
  • You’re the beneficiary of a trust or estate that originates in another state.

Any of these situations could trigger a tax liability since it holds the potential to generate revenue from that particular state and may also result in you receiving a Form K-1, reporting the results of that business operation. The fortunate outcome of receiving that form is that it usually breaks out the income specifically attributed to other states.

Whether you moved to another state during the year or earn income in another state besides where you live, TurboTax will ask you simple questions about you and help you easily file your taxes.

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