Tax Tips for Two-State Residents

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Let's face it -- the American tax system isn't known for its simplicity. And the confusion factor just climbs higher when you lived or worked in more than one state during the year.

 To help out, we've tracked down the answers to some of the most common cross-state questions. As you ponder your situation, remember that seven states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

1. What if I lived in two different states during the year?

In most cases, you have to file tax returns in each state in which you earned income.

2. What if I live in one state and work in another?

You'll probably have to file a tax return in both states. Your state of residency usually taxes all your earned income -- no matter where you earned it. Meanwhile, states where you worked but didn't live usually require a non-resident income tax return. Fortunately, your resident state will often give you a credit for the taxes you pay to other states.

3. Where do active-duty military servicemembers file?

Generally speaking, military personnel are subject to tax in their "home of record," which is the state where they resided at the time of their enlistment or commissioning. You may be able to establish a new home of record by taking actions there like: 

  • Establishing a permanent address.
  • Registering to vote.
  • Registering your vehicle.
  • Getting a driver's license.

Under federal law, states are prohibited from taxing the military income of nonresident servicemembers who are stationed in their states. Note, this protection only applies to military income. If you also have a nonmilitary job, you'll be subject to paying resident state income taxes on those wages.

4. Where do military spouses pay taxes?

Until 2009, they usually had to pay taxes in the state where their spouse was stationed. Thanks to the Military Spouse Residency Relief Act, military spouses who earn income in the state where their spouse is stationed may be able to claim either the state they are located in or their spouse's legal residence (if they have established residence there as well) for tax purposes. This only matters if the spouse has income of their own. That could make them eligible for a state income tax refund. If they had taxes withheld, they could file a state return to claim it.

5. Can I deduct state income taxes on my federal return?

Yes, but only if you itemize your deductions. You may also deduct real estate taxes, personal property taxes and state and local sales tax on your federal tax return.

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