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Six Tax Tips for Two-State Residents

Let’s face it—the American tax system isn’t known for its simplicity. And the confusion factor just climbs higher when you have 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 nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, 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. If your income is low enough, some states give you a pass.

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 service members 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:

  • Purchasing property
  • 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 that are stationed in their states. Note that 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 were usually subject to taxes in the state where their spouse was stationed. Thanks to the Military Spouse Residency Relief Act, however, they can now choose to be treated as if they still lived in their previous state. 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.

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 25 percent discount on TurboTax, which can help you complete your federal tax return and returns for the states in which you’re obligated to pay taxes.

Originally published on USAA

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