How to File Taxes if You Work Remotely or Live in One State and Work in Another

Chelsea Zhao is an assistant director of High-Net-Worth Tax Planning at Northwestern Mutual.

It's not unusual to live and work in a different state, particularly if you live in a major metro area where public transportation makes an interstate commute easier. Take New York City, for example: It’s estimated that approximately 47,000 Connecticut residents and 400,000 New Jersey residents commute to the city for work.

Living in one state and working in another can cause some additional work during tax season.

But there's no need to panic—most likely, you’re not going to pay taxes on the same income twice, even though it can get a bit complicated. Below, we take a look at the different types of agreements that exist between states and help you get a handle on how to file your taxes if you live in one state but work in another.

Where do you pay taxes when you live in one state and work in another?

The laws of the two states where you live and work will determine how you file taxes if you don't live in the same state where you work.

Some states have established provisions allowing you to work in a neighboring state without having to file or pay income taxes there. These “tax reciprocal agreements” simplify your tax obligations and ensure that you pay income taxes only in the state where you live.

Which states have reciprocal agreements for taxes?

If your work state has a reciprocal agreement with your home state, you’ll need to complete an exemption form and provide it to your employer. The following states have such agreements. (If your work state is not on this list, check out the next section.)

Arizona: Residents of California, Indiana, Oregon and Virginia are exempt from paying income tax on wages earned in Arizona.

District of Columbia: Residents of Maryland and Virginia are exempt.

Illinois: Residents of Iowa, Kentucky, Michigan and Wisconsin are exempt.

Indiana: Residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin are exempt.

Iowa: Residents of Illinois are exempt.

Kentucky: Residents of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin are exempt.

Maryland: Residents of D.C., Pennsylvania, Virginia and West Virginia are exempt.

Michigan: Residents of Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin are exempt.

Minnesota: Residents of Michigan and North Dakota are exempt.

Montana: Residents of North Dakota are exempt.

New Jersey: Residents of Pennsylvania are exempt.

North Dakota: Residents of Minnesota and Montana are exempt.

Ohio: Residents of Indiana, Kentucky, Michigan, Pennsylvania and West Virginia are exempt.

Pennsylvania: Residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are exempt.

Virginia: Residents of D.C., Kentucky, Maryland, Pennsylvania and West Virginia are exempt.

West Virginia: Residents of Kentucky, Maryland, Ohio, Pennsylvania and Virginia are exempt.

Wisconsin: Residents of Illinois, Indiana, Kentucky and Michigan are exempt.

Once the exemption form is completed, you can request that your employer withhold income taxes only for your home state but not for your work state. By doing so, you are exempt from filing a nonresident tax return in the state where you work and will need to file and pay income taxes only in the state where you live. Different states may require different exemption forms, so it’s advisable to talk with your HR representative to ensure you have the correct form.

The two types of reciprocal agreements

Reciprocal tax agreements come in two key types—bilateral and unilateral. They work slightly different from one another.

When two states enter into a bilateral reciprocal agreement, they agree to provide tax credits or exemptions to residents of the other state. The agreements can also specify which sources of income are subject to the agreement and which are not.

Unilateral reciprocal agreements are a little different because they aren’t really agreements between two parties. Instead, they work more like stipulations: If a state offers reciprocity to our residents, we will do the same for residents of their state. Indiana, Minnesota and Wisconsin are currently the only states with unilateral reciprocal agreements in place.

Even if you live and work in states that have reciprocal agreements, the agreements apply only to income earned as an employee. You will still need to file a nonresident tax return if you have other sources of income from a state other than your home state. (See below.)

What if your state doesn’t have a reciprocal tax agreement?

The good news is that federal law prohibits the same income from being taxed by two different states. So, if your work state doesn’t have a reciprocal agreement with your home state, your home state will often allow you to claim a tax credit on your resident tax return for the taxes that you paid to your work state.

The bad news? You’ll have to file two state income tax returns instead of one: a resident tax return and a nonresident tax return.

• On your resident tax return (for your home state), you list all sources of income, including that which you earned out of state.
• On your nonresident tax return (for your work state), you list only the income that you made in that state.

Non-employment income from another state

You’ll also need to file a nonresident tax return if you have other sources of income from a state that is not your home state. This includes but isn’t limited to the following:

• Income that comes from pass-through entities, such as an LLC, partnership or S-corporation
• Self-employed income from services, consulting or contract work that you performed within another state
• Lottery or gambling winnings
• Income from property sales
• Income from rental properties
• Income from dividends or investments

What if I work from home?

As fully remote work has become more popular, the number of people who work in a state different from where they live has significantly increased. So dual-state tax situations have become more common than they were a few years ago.

If your work state and home state have a reciprocal agreement in place, then you have nothing to worry about. Even if they don’t, in most cases you’ll be able to avoid double taxation by filing a resident tax return and claim tax credit for the taxes paid on a nonresident tax return, as described above.

Things can get a bit complicated if you work for an employer located in a state that has adopted the “convenience rule.” Under the convenience rule, an employee is considered to be working in their employer’s state if they work elsewhere (usually from home state) for their own convenience rather than the employer’s requirement, unless certain exceptions are met. You could potentially be subject to double taxation, as your home state and the convenience rule state may disagree on where you earned the income. Your home state might determine that you should pay income tax if you lived and worked there, and it may not offer you a credit when another state taxes you on the same income. Currently, five states—Arkansas, Delaware, Nebraska, New York and Pennsylvania—have a full-fledged convenience rule in place. Three additional states—Connecticut, Massachusetts and New Jersey—offer their own spin on the rule with some nuances.

These rules have faced several challenges in court, and there may be some changes in the future. Given the complexity, it’s crucial to work with a tax professional who can help you navigate the income tax laws of your home and work states.

An important consideration when it comes to taxes and where you live

There are a lot of reasons you might decide to live in one state but work in another. But it’s important to understand that doing so can affect your state taxes. That’s why it’s so important to work with a tax professional who understands the rules.

This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice specific to your situation.