Taxes can be complicated if you live in one state and work in another. And the rules can vary significantly from state to state.
Some states with many commuters have reciprocity agreements, so you’re only taxed by your state of residence even if you cross state lines to work. Other states tax nonresidents who work within their borders, although home states usually offer a tax credit to avoid double taxation.
And there are a few states with especially complicated tax rules for remote workers.
Here’s what you need to know about taxes if you work in a different state from where you live.
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States With Reciprocity
If the state in which you work has a reciprocity agreement with the state where you live, paying taxes is usually simple.
“You won’t be taxed on where the income is earned; you’ll just be taxed on where you live,” says Richard Auxier, director of revenue policy and analysis for the Maryland Department of Budget and Management, who previously served as principal policy associate for the Urban-Brookings Tax Policy Center.
Because of that reciprocity agreement, you can have your employer withhold taxes for the state where you live, and you’ll generally file your state return just as you would if you worked there.
In the U.S., 15 states and the District of Columbia have reciprocity agreements.
Some states have an agreement with just one other state, while others have agreements with as many as six or seven states, says Jared Walczak, senior fellow for the Tax Foundation.
The reciprocity agreements are generally with nearby states with a lot of commuters. For example, the District of Columbia, Maryland and Virginia all have reciprocity.
“The District of Columbia represents a unique case because D.C. is precluded from taxing nonresidents regardless of where they earn income,” Walczak says. “Virginia and Maryland have responded to this by adopting commuter agreements which exempt each other’s residents from tax but also ensure that they are able to tax their residents when they work in D.C.”
Kentucky has tax reciprocity agreements with the following states: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin. A few states have reciprocity agreements only with one other state. For example, Iowa offers reciprocity with Illinois; Montana with North Dakota; and New Jersey with Pennsylvania.
“Reciprocity agreements benefit taxpayers by dramatically reducing tax filing complexity,” Walczak says.
“They are particularly beneficial to hybrid workers, who may work from home several days a week and in an office across state lines on others. Reciprocity agreements eliminate the need to track which days were worked where for tax purposes, and they let each state focus on taxing their own residents,” he adds.
“There have been few or no changes to reciprocity agreements in a very long time,” says Tim Bjur, attorney and senior writer and analyst at Wolters Kluwer Tax & Accounting.
You need to let your employer know where you live and update your human resources department if you move to ensure your taxes are withheld for the appropriate state. You can look on your W-2 form to see which state’s taxes have been withheld from your income.
List of States With Reciprocity Agreements
This Tax Foundation overview provides a list of states with reciprocity and more information about the rules.
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States Without Reciprocity
Not all states offer reciprocity, even if they have a lot of commuters traveling across state lines. If the state where you work doesn’t have reciprocity with the state where you live, you may need to take extra steps when you file your tax return.
“Generally speaking, income is taxed where you earn it,” Auxier says.
You may have taxes withheld from your paycheck for the state where you work, and you may need to file a nonresident income tax return with that state as well as a resident return in your home state.
A few states have changed their rules for nonresidents who work in their state for a limited time period.
“For example, Indiana and Montana have enacted more favorable thresholds for filing and withholding taxes, benefiting remote and mobile workers,” says Lucy Dadayan, principal research associate with the Urban-Brookings Tax Policy Center.
In most cases, you get a credit for the taxes you paid to the state where you work, which reduces your income tax liability in your state of residence.
“You generally are not going to be double taxed,” Auxier says.
Since states have different income tax rates, this credit may not be for the full amount paid to the other state if your state’s income tax rate is lower.
Walczak gives an example of living in a state with a 5% income tax rate but working in a state with a 7% rate.
If you earned $60,000 in the other state, it would be taxed at 7% ($4,200), and your state would offer a credit reducing your home-state tax liability by $3,000 (5% of your income).
But if you live in the higher-tax state and work in the one with the lower rate, you would pay $3,000 to the state where you work and an extra $1,200 to your home state. Either way, the total tax liability is the same but the allocation to each state varies.
“Almost all states allow a credit for the other state’s tax,” says Mary Kay Foss, a certified public accountant in Carlsbad, California.
For example, Foss explains what usually happens if someone lives in California and pays a 9.3% tax but works in another state with a 6% tax.
“The 6% tax will be owed to the other state, and California will allow a credit based on the lower amount of what was actually paid to that state or what California charges on that state’s income. In this example, the 9.3% California tax would be offset by a credit for the 6% paid to the other state,” she says.
There are some states where the credit works in reverse. Arizona, Oregon and Virginia give you credit on the nonresident return. However, Foss says most states allow credit for their residents working in other states.
Taxes are generally based on where you physically work. That means fully remote workers usually pay taxes to the state where they live and work, regardless of where the company is headquartered.
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States With More Complicated Rules
Tax laws are especially complex in some states.
“New York and a handful of other states have so-called ‘convenience rules,'” Walczak says.
Also known as “convenience of the employer” rules, these regulations require some workers to pay income tax to the state where their employer is based, regardless of where they physically work. Remote workers who choose to live in another state for their convenience — rather than as a requirement from their employer — are subject to these rules.
“They source income to that state if your office is located there, even if you actually work elsewhere. For many remote workers who don’t have an office but whose employer is located in New York or another convenience rule state, this can result in double taxation,” Walczak adds.
Alabama, Delaware, Nebraska, New York and Pennsylvania currently have full convenience rules, says Katherine Loughead, director of state tax projects for the Tax Foundation.
Also, Connecticut and New Jersey have convenience rules that apply only to nonresidents who live in states with their own convenience rules, and Oregon has convenience rules for those who work in a managerial role for an employer located in Oregon, she says.
“Many people are required to file and remit taxes to multiple jurisdictions, but typically they are able to claim a credit against tax liability in their home state for taxes paid on income earned elsewhere,” Walczak says.
“This credit system can fall apart under convenience rules since your home state and the convenience rule state may disagree on where you earned the income,” he adds.
According to Walczak, your state of residence might conclude that if you live and work within its borders, that’s where you should pay income tax, and it may not offer you a credit when another state chooses to tax you on the same income.
Additional states may change their rules in the future. “Amid fiscal challenges and uncertain federal funding, it is possible that more states will consider changes to income tax laws to secure revenue,” Dadayan of the Tax Policy Center says.
“More states may explore adding a convenience of the employer rule to tax remote workers employed by in-state companies. With the continued expansion of remote work and increased workforce mobility, states might also reassess reciprocity agreements or adjust tax thresholds to maintain competitiveness while preserving revenue,” she says.
How to Avoid Complications
Here are four steps you can take to help avoid complications if you live and work in two different states:
1. Let your employer’s human resources department know which state you live in and ask about the rules. If the two states have reciprocity, your employer should be able to withhold taxes from your pay for your state of residence.
2. If you move to a different state, inform your employer so it can adjust your state tax withholding. Auxier says that sometimes, people forget to ask their employers to change their state withholdings, and they have to file a nonresident return to get the money back from their former state of residence.
This doesn’t affect the amount you owe — if you didn’t live or work in your former state during the tax year, you won’t have any tax liability there. However, you could face a large bill in your current state because no taxes were withheld there, and you may have to wait for a refund from your former state.
3. If the states don’t have reciprocity, determine your obligations to the state where you work. You’ll usually need to file a nonresident tax return for the state where you work and a resident tax return for the state where you live. Also, find out how your state of residence calculates any credit for taxes paid on out-of-state work. You can find out more by contacting both revenue departments.
“If you worked in multiple states, you could owe income taxes in each,” Walczak says. “Some states require taxpayers to file after a single day of work, while others have thresholds as much as a month, or thresholds based on income earned.”
He adds that anyone who owes taxes in more than one state should talk to a tax preparer if they’re unsure about their situation
4. Keep records of where you worked and when. If you occasionally go to an employer’s office in another state but generally work in your state of residence, you may not have to pay taxes to the other state if you work there fewer than a certain number of days each year. Walczak says states are beginning to raise filing and withholding thresholds and do not require people to file a return in a state where they worked only for a short time.
“Taxpayers may need to be able to document when they worked in which states and should recognize that working from multiple states can yield additional tax complexity,” he says. “If a taxpayer is unfortunate enough to work remotely for a company based in a convenience rule state, they may face double taxation.”
Special Rules for Military
The rules for active duty military members and their spouses are different.
According to Curt Sheldon, certified financial planner and enrolled agent in Alexandria, Virginia, who served for 27 years as a fighter pilot in the U.S. Air Force, “Under the Servicemembers’ Civil Relief Act, a service member does not become a resident of a state for income tax purposes if his or her presence in the state is due to military orders.”
Service members can maintain their legal residency in the state where they lived when they joined the military or establish residency in another state while they are stationed there.
“Many service members elect to establish residency in a state without income tax if they are stationed there,” Sheldon says.
For example, some service members establish residency in Florida or Texas while stationed at one of the many bases in those income-tax-free states, and they can maintain residency there as long as they’re on active duty, even after they have to move.
Find out more from your state department of revenue about the rules for establishing residency in the state where you are stationed. You usually must register to vote, register your car, get your driver’s license in that state and plan to return there after you leave the service.
The Military Spouses Residency Relief Act amended the SCRA in 2009 and allows spouses of active duty service members to maintain the same state of residency as the military spouse.
But everything changes when they leave the military. At that point, the service member and spouse will be subject to the state’s tax laws rather than the domicile they established while in the service.
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How to Handle Taxes When You Live and Work in a Different State originally appeared on usnews.com
Update 02/24/26: This story was published at an earlier date and has been updated with new information.
