State Income Tax

Ordinarily, you will have to file a state income tax return in each state in which you earn income. There are exceptions: some states will let you off the hook if you only have a small amount of income, or if you're in the military and stationed in a state that is not your home of record. A few states don't have an income tax at all. Figuring out the state filing requirements can be complicated if you earn income in more than one state.

The easiest way to deal with this situation is usually through the use of tax software. It will take all the information from your federal tax return and transfer it to the correct lines on your state tax return forms. The software usually helps you figure out what income is taxable and what expenses are deductible for each state, and will also often tell you what the filing requirements are for the states in which you have income.

This article addresses some of the more common questions people have regarding multiple state tax filings.

State Income Tax Tip

A good way to do your own research on each state's tax filing requirements is through the state tax authority's Web site. All the state tax web sites are listed at Federal and State Income Tax Forms.

State Income Tax - Frequently Asked Questions

• What if I am in the military and am stationed outside my home state?
• What if I am in the military and my spouse is not?
• Am I a resident, part-year resident, or a non-resident?
• How can I tell if my time in the state was permanent or temporary?
• How do I get the tax forms for each state?
• How do I figure out how much I owe in each state?
• What do I do if I'm a nonresident in the new state?
• Are there other times when I must file more than one state income tax return?
• What should I do if I'm thinking of moving to another state?
• How do states calculate income tax?

What if I Am in the Military and am Stationed Outside My Home State?

Military personnel designate their Home of Record as the state where they enlisted. Generally, military personnel are considered residents of their military homes of record. Federal law prohibits other states from taxing the wages of non-resident military members stationed in their state.

For example: A member of the New York military is transferred to MCAS Miramar, San Diego. The Home of Record would be New York; the Duty Station State would be California. Military wages may be taxed by New York but not by California.

Note: If the military person takes on a second nonmilitary job "in town", those wages are not covered by the Federal law. Follow the civilian rules for filing requirements for those "in town" wages.

For example: Continuing the example from above, while at Miramar, the New York military works at a retail store in San Diego. The wages from working at the store are taxable by California. A nonresident California tax return may be required (depending on the income).

What if I Am in the Military and My Spouse Is Not?

Spouses who are not in the military must follow the civilian state filing requirements (see below). Generally, the spouse will file in the state in which they earned the income.

Am I a Resident, Part-year Resident, or a Non-resident?

First, let's do the easy ones: Resident and Non-resident:

"Residency" is the location of your home where you intend to live when you return from a vacation or temporary business trip.

You are a "resident" of a state if you intend your main home to be in that state.

Example 1: You have a home in North Carolina and live in North Carolina during the year, except when you take a 4 month vacation in Florida. You file the resident form for North Carolina.

Example 2: You moved to North Carolina sometime between January and June and stayed in North Carolina for the remainder of the year (i.e. more than 6 months). You file the resident form for North Carolina.

You are a "Non-resident" of a state if you did not live in that state at any time during the tax year but you did receive income from that state because you:

• Worked in the state (but did not live there).
• Received income from sources (rental property, business, etc.) within the state, or
• Received income as a beneficiary of an estate or trust from sources within the state.

Example 3: You live in South Carolina but you work in North Carolina for one week. You file the resident form for South Carolina and file the non-resident form for North Carolina.

Example 4: You live in California and you have a rental property in Oregon. You file the resident form for California and file the non-resident form for Oregon.

Example 5: You live in New York and your great aunt died and her Connecticut farm continues to operate until it can be sold. You are a beneficiary of the farm. You file the resident form for New York and a non-resident form for Connecticut.

Example 6: You live in Colorado and you receive bank interest income from a bank in New York. You file the resident form in Colorado, but you are not required to file a New York tax return since the source of the income is money made from money (not money made from sales, workers, or property from within a state).

Second, if your situation is not as clear cut as the "resident" and "non-resident" information above, you may be a "part-year resident." Continue reading to determine your filing status and what to file.

How Can I Tell if My Time in the State was Permanent or Temporary?

You have to decide whether the time you spent in each state was permanent or temporary. The answer to this question determines which tax forms you need to fill out for each state, and how you calculate your state taxes.

• If you made a permanent move from one state to another, you are considered a "part-year resident" of each state.
• If your work in the other state is temporary and you maintain a permanent residence in the state you left to go do this work, you may be considered a nonresident of the other state.

The most important factor in determining the kind of move you made is your intent. States want to know:

• Did you intend to make a permanent move? (Whatever your intent, you need to back it up by your actions.)
• How much time did you live in the other state?
• Did your immediate family move to the new state with you?

Proving Your Move Was Permanent

You can show you intend to establish permanent residency in your new state by:

• Registering to vote in your new state.
• Registering your car with the Department of Motor Vehicles in your new state.
• Changing your driver's license to your new state.
• Purchasing property in your new state, and moving your household to the new property.
• Applying for any property tax exemption or other special privilege the law allows you because your home in your new state is now your primary residence.
• Sending your children to school in your new state.
• Moving your primary bank accounts to your new state.
• Having your membership in any social or business organizations changed to chapters or groups in your new state.

Proving Your Move Was Temporary

The IRS considers your move to be temporary if you are in the new state for work and you expect your job in that area to last less than a year.

Caution: Although many states follow the IRS rules about how to decide if your move is permanent or temporary, some states presume that you've made a permanent move if you live there for six months or more.

The truth is that it's often easier to become a permanent resident in your new state than it is to stop being a permanent resident in your old state. In most states, even though you are presumed to be a resident after you've lived there six months, you may have to be gone from your old state for 18 months before you are considered by the time test to be a non-resident.

So, it is often more important to show your intent to leave a state than it is to show your intent to become a resident in a new one. If you end up with both states wanting to claim taxes on your income, your evidence of intent will be crucial.

If you intend for your move to be temporary, avoid doing the things we just listed for proving permanent resident status, and do the following instead:

• Vote by mail in your home state instead of changing your voter registration to the new state.
• Keep the registration for your car in your old state, but be sure to call your insurer and find out if you need different coverage because your car will be in the new state for a temporary period of time.
• Keep your driver's license from your old state up-to-date.
• Live in rented property in your new state, and maintain your household in your old state.
• If you purchase a house to live in while you're in your new state, don't apply for any special property tax exemption that you would be entitled to if it were your primary residence. If you're only temporarily there, then your primary residence is still in your old state.
• Don't move your family to the new state.
• Open a new bank account in your new state if you need it for your convenience, but keep your main bank accounts in your old state.
• If you belong to certain social or business organizations, check with the chapter, group, or similar organizations in your new state to see if you can have temporary visiting membership rights. The fact that you made an inquiry about membership rights may be a deciding factor if your residency is challenged.

Most important, be sure to move back to your old state when your temporary period of residence is over.

How Do I Get the Tax Forms for Each State?

You can always check the Internet. Most state taxing authorities have their own Web sites, and you can usually download tax forms right off of the site. Go to our list of all the state tax Web sites at Federal and State Income Tax Forms.

For the state where you are currently living, go to your local post office or library to get the required tax forms. If you can't find the forms there, look in the Government listings in your phone book under Taxes. There should be a toll-free telephone number that you can call to find out where you can get the forms. There might even be an office located close to you.

If the tax forms and instructions for the state you moved from aren't forwarded to your new residence, write to your old state's income tax office.

If you want to prepare your state taxes on your computer, tax-preparation software will often provide coverage for all states that impose a state income tax.

The income tax form package for each state contains specific instructions for part-year residents and nonresident filers. If your move is permanent, look for the part-year resident forms. In some cases, you must fill out a different tax form for your state income tax return, and in other cases, you must include an additional tax form to cover your state taxes.

If you're a temporary resident, file a nonresident state income tax return in your temporary state and a regular resident state income tax return in your home state.

How Do I Figure Out How Much I Owe in Each 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: California resident receives $20,000 from a rental building in Arkansas. They report only the $20,000 on the Arkansas non-resident form and pay $2,000 in tax to Arkansas on the non-resident form. Since the person is a California resident, California also taxes the $20,000 but gives a $2,000 tax credit on the California resident form.

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 are 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 apportionment schedule to figure out 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.

Figuring the Apportionment Percentage

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 overall and you earned $30,000 in the 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.

Common Method 1

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.

Common Method 2

Other states require you to prorate your itemized deductions, personal exemptions, and certain other allowable deductions and credits using your apportionment percentage so that the taxes you pay to the new state are based on this prorated amount.

What Do I Do if I'm a Nonresident in the New State?

As a non-resident, 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.

Are There Other Times When I Must File More than One State Income Tax Return?

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.

What Should I Do if I'm Thinking of Moving to Another State?

Consideration 1: States That Don't Have Income Taxes

If you're thinking about relocating but you are not sure where to move, consider moving to a state that does not have state income taxes. These states are:

• Alaska
• Nevada
• South Dakota
• Texas
• Washington State
• Wyoming
• Florida (they have no personal income taxes, but they do have taxes on the value of certain business assets)

Two other states, New Hampshire and Tennessee, tax only dividend and interest income. There are no state income taxes on wages or self-employment income.

If you can't avoid states with income taxes, these states don't hit your pocketbook so hard:

• Alabama
• Delaware
• Louisiana
• Missouri
• Mississippi
• New Mexico
• North Dakota

Consideration 2: Moving Expenses

If your employer is moving you from state to state and paying for your moving expenses, some of your reimbursed moving expenses could be tax-free but some might appear on your Form W-2 as part of your taxable income.

Consideration 3: Timing Your Move

Most states don't require you to file a tax return if you have a minimal amount of taxable income during the year. This might influence when you start a new job, especially if you don't have to start working right away.

Consideration 4: Renting Property in the State You Move From

Even if you establish permanent residency in the new state, if you rent out your house in your old state, you will most likely have to file an income tax return in your old state to report your income and expenses.

If you have a net profit on your rental property, you will most likely have to report your rental income and expenses on both your old state and your new state income tax returns. However, your new state will most likely allow you a credit for the taxes you pay to your old state because of the rental property income.

Even if you have a loss on the rental and might not have to file a return in your old state, consider filing a return anyway so that you can establish with your old state that the rental property produced a taxable loss. This might come in handy if you want to carry that loss over to offset some rental income taxable by your old state in the future.

Consideration 5: Moving to a Third State

You might have to pay state income taxes in all three states. Carefully read the filing requirements for each state you lived in before you fill out the paperwork.

Consideration 6: Interest and Dividend Income from Your Old State

Interest and dividend income is generally taxable by the state where you are considered a permanent resident. So, if you move from Arizona to California and it's a permanent move, California will tax you on the interest income from your Arizona bank accounts during the time you're a resident of California, and Arizona won't tax you for the same period.

However, if the income you receive is part of a business that you have in the old state, both states will tax the income, and you must apply for a credit on your new state's tax return. For example, if you receive interest on the accounts receivable in a sole proprietorship you operate in Arizona, and you're a permanent resident of California, you have to pay tax on the interest on your business accounts receivable to Arizona and apply for a credit on your California taxes.

Consideration 7: Tax-Exempt State Investments from Your Old State

If you have investments that are tax-exempt for your old state, they may be taxable in your new state. For example, if you live in North Carolina and hold municipal bonds from one of the agencies or municipalities of the state, you won't pay tax on that income if you are a permanent resident of North Carolina. But if you own the same bond and live in Idaho, you pay Idaho income tax on the income. Review your financial portfolio as part of your move preparations.

Consideration 8: Tax-Exempt Federal Bonds and Other Investments

States don't make you pay income tax on federal obligations such as Series EE bonds or treasury notes. However, states don't all agree on what, exactly, a federal obligation is.

Some states consider that if an obligation is "backed by the federal government" the obligation is tax-exempt. Others say this criterion isn't enough and they will tax certain obligations because the obligation is invested only in something backed by the government but not in the government.

Consideration 9: Retirement Income

Most states that collect income tax also tax your retirement income, although the method they use to determine the retirement tax varies from state to state.

Some states provide a fixed amount that you can subtract from certain retirement income, and others don't tax certain pensions at all. For example, depending on your age, Utah has a set amount that you can deduct from qualified retirement income. Louisiana doesn't tax state teachers' or employees' retirement benefits at all.

If you are receiving retirement income from a business in your old state but you move to a new state, federal law says that your new state can tax your retirement income, but your old state can't.

Generally, if a state doesn't tax retirement income, it's because that income is a pension you earned with one of that state's agencies.

Consideration 10: Penalties for Unpaid Estimated Taxes

If you have income that isn't subject to state income tax withholding (such as pension or investment income) be sure to check out the estimated tax payment requirements in your new state. You don't want to get hit with underpayment penalties.

How Do States Calculate Income Tax?

While most states start with your federal adjusted gross income (AGI) to determine your taxable income, your new state may handle other tax-related areas such as itemized deductions differently. Consider the following questions when figuring taxes for your new state:

How Does Your New State Handle Itemized Deductions?

While most states handle itemized deductions like a federal return, some states allow only a fixed amount of deductions, no matter how many deductions you have on your federal return.

Does Your State Allow you to Deduct State Taxes?

Most states won't allow you to deduct state income taxes you paid, but some states go the opposite route and actually allow you to deduct a portion of the federal income tax you paid.

Has Your State Incorporated the Latest Federal Tax Changes?

Even though most states use the Internal Revenue Code (IRC) as the starting point to determine state taxable income, many states have been slow to incorporate the latest federal changes, or have handpicked the portions of the IRC they want to use.

If you need answers to these questions, contact your state taxing authority or see "What's New" in the first screen of TurboTax for your state.

Updated for tax year 2007