Tips to save money on your tax return this year
Are you feeling stressed during tax season? Don’t worry. TurboTax CPA Lisa Greene-Lewis shares tips to make the filing process easier.
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Hate paying taxes? What if I have to pay twice?
Regulations usually prohibit Americans from doing such things, but it can still happen in some cases. The potential for double taxation typically arises when people live and work in different locations. For example, if you choose to work in a different state than your employer, although it is not required.
Even if you can avoid double taxation, sorting out the rules can be complicated and require additional tax returns. Each state has different rules, but states generally require you to pay taxes and file a return if you are a resident or nonresident earning income within the state. Unless your state has a reciprocity agreement with your home state or doesn’t impose income taxes. You may also be required to file a tax return in your employer’s state.
State taxes can be complicated, so before you commit to a work-from-anywhere lifestyle, understand what’s in store come tax season.
Don’t worry about these conditions
In states without income taxes, you may not have to file a state income tax return. they are:
- alaska
- florida
- nevada
- new hampshire
- south dakota
- tennessee
- texas
- wyoming
- washington
What is a reciprocal tax agreement?
If you work in a state that has a reciprocal tax agreement with your home state, you won’t be taxed twice. As long as you complete and submit the exemption form for the state you work in to your employer, the state you work in doesn’t have to withhold taxes from your paycheck, you just need to file your return in the state you live in. Make sure your employer withholds taxes for your home state. “Failure to do so could result in underpayment penalties at tax time,” warns tax software company Intuit’s help site.
For example, if you live in Wisconsin but commute across the border to Illinois for work, you won’t pay Illinois taxes or file a tax return in that state. You only need to pay Wisconsin taxes and file state forms.
“If you do not file an exemption form in a state of non-residence, your employer may withhold taxes in that state,” filing software company TaxSlayer says on its website. In that case, you will likely need to file a non-resident return seeking a refund of the taxes withheld.
According to the Tax Foundation, a nonprofit research think tank, 16 states and the District of Columbia have reciprocal agreements.
What would happen without tax reciprocity?
If there is no reciprocity between the two states, some states allow a deduction for taxes paid in states where you do not reside and work. You must file income tax returns in both states to receive the credit. This means filing a residence state income tax form for your home state listing all sources of income and filing a nonresident tax return listing only your salary income.
Note:
- Even if the state where you receive the credit has a lower tax rate than your home state, you may have to pay some of the residual tax.
- Residence is also a prerequisite for receiving a loan, which can be tricky, warns Nathan Hagerman, a partner at Taft Law. Typically, a person will stay in the state for six months or more for purposes such as receiving mail, obtaining a driver’s license, voting in the state, buying a home in the state, and other purposes to make the state a permanent home.
- Credit does not apply to local or county taxes.
Whose convenience is this?
A few states have an “employer’s convenience rule,” which means that if you work in another state for your own convenience (rather than the company’s obligation), you are liable to pay taxes in the state where your employer is based. Unless you live and work in a state that doesn’t have an income tax, you could be taxed twice on the same income.
Some states offer credits that can offset some or all of the taxes you owe to your employer’s state. For example, New Jersey offers tax credits to offset state taxes paid to New York by its residents due to its telecommuting accommodation provisions.
Which states have “employer convenience rules”?
Each state’s rules may vary slightly, but according to Northwestern Mutual, here are the rules to be aware of:
- connecticut
- Delaware
- nebraska
- new york
- pennsylvania
- new jersey
What if we split our time between many states?
Taxes can become more complicated if you stay in multiple states, and you may need to track time spent in each state.
More than half of the states with personal income taxes require employers to withhold taxes from nonresident employees’ paychecks from the first day they travel to the state for business purposes, although some states allow them to work there for more than 30 days the first time, according to the Mobile Workforce Coalition, a group of 280 organizations that advocates for simpler state income tax rules for nonresidents.
Athletes who regularly practice and play across state lines, as well as consultants and construction workers who may spend months at a time on projects in different cities, must pay income taxes in each state in which they earn income.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
