Do you pay income tax where you live or work?

The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, and you must file income tax returns for both states.

There are some exceptions to this general rule. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.

As of 2020, employees are free from state taxes in:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming

If you work in one of these nine states but live in one of the other 41 states that do impose a state income tax, you will generally only pay resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in one of the other 41, you would only pay nonresident taxes for the state where you work.

Some states have reciprocal tax agreements. Reciprocal agreements allow residents of one state to work in a neighboring state without having to file nonresident state tax returns in the state where they work. For example, if you live in Milwaukee but commute to Chicago, your employer would only deduct Wisconsin state taxes from your paycheck.

If you work across state lines in a state with no reciprocal tax agreement, then you will need to file an income tax return for both states. However, you should be able to claim a credit on your resident state income tax return for the state income tax that you paid in the nonresident state.

Note that reciprocity is not automatically awarded. You will have to file a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request with your employer, you will be taxed by both states, and you will be obligated to file both state income tax returns.