Basic Tax Math - Part 6 - State Taxation

While dealing with federal taxes is hard enough, anyone who works in more than one state has a greater challenge juggling all the different state tax returns.

How are taxes computed when you work in more than one state?  Well on paper,  it's pretty simple, however, it is a great source of confusion for most.

The rules run like this: Your home state will tax your global income, regardless of where you earned it and regardless of whether you earned any income in your home state. It doesn't even matter if you were gone for an entire year and never set foot in your home state- the fact that you maintain a legal domicile in your home state is a sufficient basis for that state to tax your global income.

At the same time,  when you work in another state and labor on its soil,  that state has the right to tax all of your income earned within its borders.

Now.  Are you being taxed twice on the same income?  Yes.  But, there is relief.  Your home state is obligated to give you a credit for the tax that you pay to the work state on the same income. Many states will call this,  "credit for taxes paid to other states".

To illustrate:  say you live in a state that has a 5% tax. You work a temporary assignment in a state that has a 2% tax. Since the tax you pay to the work state is less than the tax you would pay to your home state on the same income, you will have to make up the 3% difference.

Let's look at this illustration in reverse: Say you live in a state with a 2% tax and work temporarily in a state that has a 5% tax. Since you pay more to the work state than you would in the home state, there is nothing due to the home state, since the credit brings the tax liability for that income to zero.

I will explore other nuances of multistate taxation in later posts.