The U.S. government collects income taxes from workers in the U.S. through the Internal Revenue Service, but many workers are also required to pay state income taxes. If you earn income in a state other than the state where you live, you may have to pay income taxes both to the state where you earned the income and to your home state.
State Income Tax Basics
You must pay income taxes on the total amount of income you earn to the state where you reside if that state imposes income tax. According to TurboTax, the following states do not impose taxes on earned income as of February 2011: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. In other words, if you work out of state or earn income from other states in some other form, such as through business activity or rent charged on rental properties you own, you include that income on the state tax return for the state that you live in.
When you earn money in a state other than your state of residence, you must pay income taxes to that state on the money earned. You can, however, take a tax credit on your home state's taxes up to the amount of tax you paid to the nonresident state in most cases. For example, if you live in Wisconsin but earn $10,000 for work you perform in Minnesota, you must pay state income taxes to Minnesota on the $10,000, but you can subtract the tax that you pay to Minnesota from your Wisconsin state income tax liability.
You must usually file different state tax returns with each state where you earn income. If you live in one state and work in another, you should file a nonresident tax return to the state where you work before filing a tax return to your home state. In some cases, you may have to file tax returns to several states other than your home state.
Earning income in multiple states makes filing taxes more complex than if you only earn income in your home state. Each state has different income tax filing rules, so preparing multiple state returns can be a laborious process. Using tax preparation software can aid the process.