Multi-State Tax Returns: How to Avoid Double Taxation

Navigating multi-state tax returns can be complex, but there are several strategies to avoid being taxed twice on the same income. Here are four key methods to consider:

1. Allocate Income Between States

If you moved during the tax year, you can allocate your income to each state where you lived. This provides a clear distinction of where your income should be taxed. However, this can become complicated if your W-2 or 1099 only reflects one state, or worse, the wrong state. In such cases, you may need to use a combination of other methods, such as taking a credit for taxes paid to other states or adjusting for state wage allocation.

2. Credit for Taxes Paid to Other States

If your income has already been taxed in one state but you’re also being taxed by another state, many states allow a “credit for taxes paid to other states.” For example, if you earned income in South Carolina (the source state) but lived in North Carolina (the resident state), you would pay taxes to South Carolina and apply for a tax credit on your North Carolina return. This prevents you from being taxed twice. Be aware that some states require full-year returns for tax credits, especially if you moved during the year, and we may need to be creative in how we file to stay compliant with state laws.

3. State Reciprocity Agreements

Some states have reciprocity agreements, meaning you only need to file taxes in your resident state. For example, residents of Washington, DC who work in Virginia only file in their home state. Other states with reciprocity agreements include Arizona, Illinois, Indiana, Maryland, and more.

4. Reverse Credit States

In some cases, like California, you pay taxes only in your resident state, even if you worked in another state. For instance, if you live in California but work in Oregon, you would only pay taxes in California, avoiding tax payments to Oregon.

A Note on City Taxes

Cities like Detroit, New York, and Philadelphia may impose taxes based on your residence, regardless of where your income was earned. These cities often do not offer credits for taxes paid to other states, making this a unique situation. Reach out to us for more information if this applies to you.

Need Help with Multi-State Tax Returns?

If you need assistance with any multi-state tax matters, contact us for expert guidance on how to manage your returns and avoid double taxation!