Let's be blunt: The American tax system is complicated. If you lived or worked in more than one state during the year, filing your state taxes can be confusing.
"One of the most important things to remember when you've lived in more than one state is that you'll likely have to file income tax returns in each state," says J.J. Montanaro, a certified financial planner ™ practitioner with USAA.
To help cut through the confusion, we've tracked down the answers to some of the most common two-state tax questions. As you think about your situation, remember that nine states don't tax residents' wages and seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have no income tax at all. New Hampshire and Tennessee, while not taxing wages, do collect tax for dividends and interest.
1. What if I lived in two different states during the year? In most cases, you have to file a tax return for each state in which you earned income. "Don't make the mistake of thinking you only have to file where you’re living at tax time," Montanaro says.
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 nonresident income tax return.
3. Where should active-duty military service members file? Military personnel are subject to tax in their state of legal residence. Generally speaking, this is their home of record -- the state they resided in at the time they enlisted or commissioned. You may be able to establish a new legal residence in another state by:
- 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 service members stationed in their states. However, service members who also have a nonmilitary job are subject to paying resident state income taxes on those wages.
4. Where do military spouses pay taxes? Thanks to the Military Spouse Residency Relief Act, spouses of service members no longer are required to pay income tax in a state that is not their legal residence. If they live and work in a state solely as a result of military orders, their tax obligation remains to their state of legal residence. This treatment is similar to that of the service member. If state taxes were withheld from the spouse's earnings, he or she can file a state tax return to claim them.
5. Can I deduct state income taxes on my federal return? Yes, but only if you itemize your deductions. You also may deduct real estate taxes, personal property taxes, and state and local sales taxes on your federal tax return. "Don't just assume you should take the standard deduction," Montanaro says. "Run the numbers to see if it's better for you to itemize."
6. What's the simplest way to sort all this out? Using an automated tax preparation program can make it a lot easier. USAA members enjoy a discount on TurboTax®, which can help you complete your federal and state tax returns.1 Active-duty members receive TurboTax's Military Edition for free through USAA.