As if your tax return wasn’t confusing enough, you have now gotten a job across the border from the state where you live. So now that you live in one state and work in another, to whom do you pay state taxes?
Let’s look at the various possibilities for state tax filing, from the most tear-inducing to the least:
1. Both states? Sounds like a possibility, doesn’t it? Well it is. It’s a very distinct possibility that you will pay state taxes in both states and owe in each state if you are not careful how you fill out your tax return.
2. Your home state. Makes sense. After all, you always seem to be giving some of your money to the place where you live. This, however, deserves further investigation before you cheerfully say, “Okay, here’s a third of my money.”
3. Your employer state. You’re getting warmer.
4. Neither state. May be a possibility!
Generally, when you do your state tax filing, you file a resident return for the state where you live. If you work but do not live in the other state, you may have to file a non-resident or part year resident return.
There is a nifty little credit that a lot of states offer, called the Credit for Taxes Paid in Other States, which you seriously need to take advantage of if at all possible. Check for this credit when you do your taxes online with TaxSlayer by going into your state return from the Main Menu and clicking on the Credits option.
Some states actually have a reciprocal income tax agreement with one or more nearby states. According to Pennsylvania’s reciprocal income tax agreement with their neighbors, one state will not tax employee compensation if the employer in the other state withholds part of the paycheck. In other words, your employer state withholds Pennsylvania tax withholdings from your check instead of your employer’s state tax withholding.