How do I handle my taxes when I live in one state and work in another?

Ralph Estep
00:00:00

Are you feeling overwhelmed by state tax confusion? Maybe you're commuting across state lines for work, or perhaps you've embraced remote work from a different state.

If you're losing sleep, wondering if you're paying too much in taxes or worried about potential audits, today's episode will give you the clarity you need. Stay tuned as we answer the burning question, how do I handle my taxes when I live in one state and work in another?

Podcast Announcer
00:00:25

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.
Welcome to Ask Ralph, the show where real world experience meets biblical truth. To break the bondage of financial despair.
To get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph Estep
00:01:02

Well, thank you for joining me today.

As we continue our adventure in 2025 and today's show, I'm going to talk about something I get asked routinely here in my tax practice, and that's Ralph, what do I do when I work in one state and live in another? So that's what we're going to talk about today.

If you missed yesterday's show, I replayed an incredible interview I had with Robert Plank on his show about taking control of your finances. And listen, it was packed with actionable steps that you don't want to miss. So I'm going to encourage you to check out that episode in our archives.

Today's listener question comes to us from Mark, right here in my home state of Delaware. And it's what Mark writes. He writes, dear Ralph, I recently accepted a job in Pennsylvania, but I live in Delaware.

I'm worried about double taxation and confused about which state gets my tax money. Every time I try to research this, I get conflicting information. Can you help me understand how to handle this situation properly?

I want to be a good steward of my finances, but I'm feeling lost. Well, Mark, thank you for your question. And that is a question. Like I said, I get this routinely. And yes, you don't want to mess it up.

And here's a dirty little secret. A lot of people don't talk about this, but oftentimes even the employers don't understand it.

But ultimately, as the taxpayer, you've got to make sure you're doing things right. So again, Mark, thank you for your question.

And listen, if you've got questions like Mark, besides submitting them to the show, which you can do right at justaskralph.com if you just go to that just askralph.com it'll pop up. You can type in your question, but you also should know that on our website, that's at askralph.com we have a search button.

You can click on that search button and see if I've done a show about the particular topic. And before you make a decision, you could use that to find if I've already given an answer.

Well, today's Bible verse comes to us through from the book of Romans 13:7. And Mark, your question reminded me of an important scripture and it speaks directly to our responsibility as citizens and Christians.

And like I said, it comes to us from Romans 13:7. And this is what it says. It says give to everyone what you owe them. If you owe taxes, pay taxes.

I don't know about you, Mark, but I think that verse perfectly addresses today's topic about handling our tax obligations across state lines. So that's exactly what we're going to talk about today.

Now, as you know, a few days ago I told you I'm going to start putting a gratitude statement in every show. So here's today's gratitude statement.

And I think we all need to start each and every day with a statement of gratitude so we can appreciate just what we have. But today I'm grateful for how this verse from the Bible reminds us that being honest with our taxes isn't just about following the law.

It's really not that simple. That is part of it. But the true meaning of today's Bible verse and what I'm grateful for is it's our ability to honor God with our finances.

And that's why I do this show.

So today's grateful statement, I'm grateful today for how this verse, this book of the Bible reminds us that being honest with our taxes isn't just about following the law. It's about honoring God with our finances. And that's the whole point of the Ask Ralph show. Well, let me tell you about Lewis.

Now, Lewis, what I what I'd call the modern industrial nomad, now he's a skilled pipe fitter living right here in Delaware. Lewis isn't his name, but I changed his name to keep a secret of who he actually is.

But with Lewis's job, he was constantly getting involved in interstate travel because he had to go where the Jobs were he's a union pipe fitter. So sometimes he'd work in Delaware, sometimes he'd work in Maryland, sometimes he'd work in Pennsylvania. He's worked in Vermont. You get the idea.

He's worked all over the place. And I've got many clients that travel all over the place because they're skilled trade workers and they go where the work is.

And be honest with you, with COVID I saw a lot more of that. I had a lot of nursing clients who went to other states because they needed to fill in for people over there.

And in Lewis's case, he often spent weeks or even months away from home. I remember once, then I didn't see him for about two years because he actually was on a project that lasted two years.

As I recall, it was down in Texas. And so you might be saying, ralph, okay, well why does this matter? Because there really are some hidden costs when you look at multi state work.

Because here's the first thing you need to understand is you have to file a tax return in the state where you live. That's a given.

No matter what happens where you live, if there's a state income tax, and we'll talk a little bit about some states that don't have those, but you've got to ultimately file a tax return where you live. Now, if you work in another state and your employer withholds taxes in that state, you're going to need to file a tax return in that state as well.

So you've got to keep track of stuff in each of those states. Maybe you got to keep track of expenses for each state.

You're also going to have additional costs because if you come to somebody like me to do your tax preparation, we're going to have to do multiple states. We charge more for that because it's more involved.

And a lot of times you want to make sure you do this because I want to tell you a little aside here.

Most of the time when I see a state tax notice, that's that state, not east state, but the state tax notice, it's usually because somebody made a mistake. And I'm not going to pick on TurboTax, but TurboTax is great about messing up the states.

I don't know how many times in my career I fixed TurboTax state tax returns because they were just not right.

And oftentimes I was able to repair it or fix it or file an amended return and it actually resulted in the taxpayer getting money back from the state. Now I've also had situations where they owed the other state or they didn't even file.

And so that's a hidden cost of this because you're going to have to pay somebody to do it or do it yourself, which means you're going to have to buy new or additional modules. And there's a mental burden of managing those complex tax situations.

And of course there's time away dealing with, you know, away from your family and dealing with all this paperwork. So you don't want to overlook the hidden cost of multi state work.

But like I'm going to say to you right now, most of my clients have found it to be very economically great because they may go where the jobs are, but you got to keep track of these things. So this one I call the administrative nightmare.

Here's what you need to do if you're going to be working in multiple states, even if you're going to be working in multiple cities. For example, just north of us is the state of Pennsylvania. And in the state of Pennsylvania, there's a city called Philadelphia.

Now Philadelphia actually charges a wage tax while you work in the city. So you got to keep track of every single day worked, where you were.

Because when you go to do your state tax return, if your employer doesn't break out those wages by state, somebody like me or your tax professional is going to say to you, hey Joe, which days did you work? What was your percentage of income?

So you want to make sure you're maintaining separate income records by state because each state is different and each. Another thing I'm going to mention here is part of the administrative nightmare is different states have different filing deadlines.

For example, a lot of people don't know this. Many states have the tax return that's in sequence with the IRS return. So generally due April 15th.

Well, in Delaware it's not due till the end of April. So a lot of people don't understand that. And then when you move from state to state, there are different rules, there's different regulations.

Some states allow you to itemize, some make you take a standard deduction, some let you deduct for 401k or retirement, some don't. And that's where it gets complicated. Because. Because you have a higher risk of getting audited from those multiple states.

Because here's a dirty little secret. The states want their share. They want their piece of that pie.

And my experience has been over the last 10 years or so, states have gotten very, very aggressive about going after employers and employees, making sure they're getting their piece of that pie. Because they want those state income taxes, which leads to complex recordkeeping requirements.

And that's why I call that the administrative nightmare. Well, another thing you have to consider is the financial impact. Like I talked a few minutes ago, your tax preparation cost may be higher.

Now, a lot of people say to me, Ralph, hold on a second. Did you just say that I've got to file a tax return in the state where I work and the state where I live? Isn't that going to be double taxation?

And my answer is yes, but not exactly. And it depends on the state. For example, I'll give you a real homegrown example here.

If you live in Delaware and you work to the north of us in Pennsylvania, you're going to file a Pennsylvania resident, or excuse me, a Pennsylvania non resident return because you're living in Delaware, but you're working in Pennsylvania. So Pennsylvania wants their piece of that pie. They want you to pay that, that state income tax.

Well then when you, since you live in Delaware, you've got to file a tax return in Delaware. Well, Delaware will actually give you a credit for the taxes you paid in the other states. You don't actually have that double taxation.

There's a lot of nuances to that and every state is different. And we'll talk about some reciprocal agreements between states in a few minutes.

But this can cause problems because a lot of times what will happen is the employer will say, well, Joe, where do you live? Well, I live in Delaware. Okay, well, you're working in Pennsylvania, so the employer is going to take out both Pennsylvania and Delaware taxes.

So that's where working with a professional, they can help you guide through that. Because here's a. We'll get back to that example I just talked about. Here's a great example of this.

So let's say you're that employee that works in Pennsylvania, but you live in Delaware. Well, in Pennsylvania, they have a flat income tax of 3.07%. Pretty simple.

Your employer plugs in the amount of earnings you had, multiplies that by 3.7%, and bang, you're done. Well, then you go to Delaware. Now, Delaware's tax rate is progressive, just like the irs, depending upon how much income you have.

So your Delaware income tax rate could be 8%. And then you're doing the math in your head. You're saying, ralph, I think I understand what you're saying. Exactly.

So you would have a situation where you think you've paid all your state taxes. And you said, Ralph, well, you said there's a credit for Taxes paid in the other state. But here's the problem.

The credit is only equal to what you paid in the other state.

So in Delaware, my clients that live in Delaware, work in Pennsylvania generally always owe Delaware taxes, because that 3.07% is a lower tax rate than Delaware's rate. So you owe the difference.

So that's where a lot of times having that double withholding or making estimated tax payments can really keep you out of trouble.

And maybe you also have to keep track of travel expenses a lot of times now, because the itemized deduction, you can't take those person or those miscellaneous itemized deductions. A lot of employers pay for these things. But you may need to be submitting travel records, you may need to be submitting expense documentation.

And of course, there's always banking complications across state lines as well. Now, I've talked a lot about the financial side and the tax side of this, but there's also a personal toll to this.

There's the stress of managing multiple tax obligations. I have many clients that have said to me, ralph, like, for example, the guy was talking about the beginning.

You know, he's worked in this state and that state. He says, after a while, ralph, I lose track of how many W2s I'm actually supposed to get.

Now, in his case, what I told him to do is just keep your pay stubs.

So that way, by the time you get to the end of the year, you know what you worked, and you're expecting those W2 forms, because unfortunately, that can become a nightmare, you know, and you might lose some time doing extra paperwork. You got this constant worry about compliance. Another big thing.

And a lot of people don't think about this if you're doing that jobbing around or that shopping around for a job, there's some financial unsecurity between jobs. Like, you might not know when that next contract is coming.

It also creates a lot of complexity with retirement planning, because if you just have one employer, it's pretty easy to set it and forget it for that 401k or that 403b. But if you're moving from job to job and you're not in a union job.

See, the thing is, most of the union folks are in good shape with this because they work out of the union. The union handles all their retirement planning and all that sort of thing.

But if you don't and you're just going from job to job, like a lot of my nursing clients did during COVID you may have to be setting up those retirement plans or you might not be able to do them at all because you haven't worked long enough with a particular employer. And I'm just throwing things out there so that you understand it's bigger than just the taxes.

There are these other things and of course that leads to impact on credit and financial decisions. Now, like I talked about a little while ago, some states offer credits.

Like I said, if you work in another state and you live in Delaware, Delaware is going to give you a credit for those other taxes. But it's complex and those credit calculations vary by state and not all expenses are eligible for credits.

There's timing issues with these credit applications and there really isn't a whole lot of support for these interstate workers, these people who are doing this job and around. But here's the thing. A lot of industries, they rely on this because they need those skilled workers. Like that pipefitter. He's a union pipefitter.

When there's a big job, he goes to it. But you know, and the thing is though, what people don't really understand is that it really has an industry wide impact on everything.

Now, a few minutes ago I told you I talk about this whole notion of state tax reciprocity. That's a big word to get out there.

But I want to explain that to you because a lot of situations that is the case now, Delaware is one of those states. It's like they got walls up around Delaware. We don't have a reciprocal agreement with anybody.

But just to the north of us is Pennsylvania, to the east of us is New Jersey, and to the south of us is Maryland. Well, Pennsylvania, New Jersey and Maryland all have these reciprocal agreements.

And what that basically is it's an agreement between states and it allows workers to work across state lines without having to do those dual taxations. And workers pay taxes only in their home state, which makes things so much easier for paycheck withholding and you don't have as much paperwork.

So let me give you an example of that. So let's say you live in the state of Pennsylvania. Pennsylvania is right next door to New Jersey.

But let's say you live in Pennsylvania, but you work in New Jersey.

Well, because Pennsylvania and New Jersey have this reciprocal agreement, your employer is only going to withhold Pennsylvania taxes even though you might be working in New Jersey or vice versa. So that really does streamline. Same thing happens if you live in Pennsylvania and you work in Maryland. Now here's where the problem starts.

If you have an employer, and I've come across these even had some of my clients that didn't understand this when we first took them on as clients. If you have a client, is withholding the wrong state? For example, it wasn't a couple of years ago I had a client with that exact same situation.

They lived in Maryland, but they worked in Pennsylvania. Well, the employer was withholding Pennsylvania taxes.

And then all of a sudden, so the client just figured, well, I just need to file Pennsylvania taxes, because that's where I'm on withholding is. All of a sudden they get a letter in the mail and they go crazy with me. They call me Ralph. What do I do here?

The state of Maryland's asking me for tens of thousands of dollars. And I said to them, I said, well, you and I never worked together, but explain to me what's going on.

And they said to me, they said, ralph, listen, I live in Maryland, but I just travel. It's two or three miles because the states actually abut up to each other out to the west of Delaware.

And the fellow says, look, I work like five minutes from my house, but it is in Pennsylvania. And my employer is withholding Pennsylvania taxes. So I figured that's what I had to pay. And I had to explain to him, no, your employer is wrong.

And trust me, this happens. The employer was wrong. What the employer should have been doing was withholding taxes in Maryland, which was their home state.

So that's the thing, you need to understand these rules.

Because I don't know how many times someone has come in to sit down with me or doing their taxes and I look at their W2 and I say, wait a minute now I see you had New Jersey taxes withheld, but I know you live in Maryland. Well, why didn't the reciprocal agreement work? Well, I don't know anything about that, Ralph.

I'm not a tax expert saying they go back and retrain their employer. Now the thing about these reciprocal agreements, there's only 16 states plus the District of Columbia that participate.

And most of the time it's regional. Like I said here in Delaware, where this, we get a little island all around us, everybody is reciprocal with each other.

And not all agreements offer the same benefit. So that's why you really need to understand there's day limits, there's restrictions, and there's also different rules for different professions.

Now the types of agreements that are available, what's called bilateral, unilateral, you know, a bilateral is two state mutual agreements, that's why they call it bilateral and a unilateral one way recognition. And I'm not going to spend a lot more time on this.

But just know that those things are out there and be aware of the varying documentation needs and any specific occupation exclusions and how you have to handle those.

Now one of the beautiful things is there are actually, and a lot of people don't know this, there are actually nine states in the US that don't have income tax at all. And that really makes things simple because you don't have those state tax like that one I mentioned a little while ago.

That client took a two year position. Well, he did it in Texas. Well, Texas doesn't have a state income tax. So the only tax he had to pay was his federal tax.

Now he thought he was fine, no problem, but he didn't realize that his home address was still in Delaware. His driver's license was still in Delaware.

So even though he was working in Texas and Texas wasn't withholding any state taxes, therefore Delaware wasn't going to give him a credit. He ended up owing a ton of money to Delaware and I know it took several years for him to pay back all that he owed Delaware.

Again, he didn't realize the important part of that. And that can have an impact on retirement planning. And also from the business perspective, it's a competitive advantage for businesses.

Now the benefit to the employers, and I'm not going to talk a lot about that, I do have some listeners that are employers. The benefit to that when there's no state income tax, obviously it makes it simple for payroll processing.

You don't have as much administrative costs. You can bring talent from other states because you can push them and say, hey, another state that doesn't have income taxes, Tennessee and Florida.

And this is the thing, these businesses, they get set up in these states where there's no state income taxes and it's a huge incentive. Now I've done shows talking about how really that's not the big panacea that everybody thinks it is because I'll use Tennessee as an example.

Tennessee might not have a state income tax, but they certainly have a sales tax. So if you're paying, if you're not paying Tennessee state income tax, that's one thing.

But shop anywhere in Tennessee and they're going to hit you with their sales tax. And some cities in Tennessee actually have an additional sales tax so much so that you could be paying up to 10% tax.

So again, there's no perfect setup for this. But I just wanted you to understand what's going on.

You know, if you're an employee and you live in that state where there's no income tax, obviously you just have to file the single federal tax return. Your take home pay is higher because you have to worry about those things. You don't have as much in tax preparation costs.

Makes it simpler for financial planning and it gives you clear tax obligations. So what's my big takeaway from this? Here's my multiple big takeaway from this.

These are complex qualification rules and like I said, it depends on the state. There's different deadlines, there's changing regulations. So what is good old Ralph telling you to do? This is where you need to get expert guidance.

Don't count on online software.

It might be fine for your federal tax return, but when it comes to the state tax return, I think you're going to be upset because it probably won't do a good job. And so here's my tips for multi state workers.

And Louis, your story brings out some practical tips for those of you who find yourself working in multiple states. First thing I'm going to tell you to do, keep meticulous records. Just like Mark, keep detailed records of your income and expenses in each state.

This will make tax filing much easier and it's going to help you avoid any issues with tax authorities. And you don't want to get those audit notices. They're no fun. Number two thing, use tax software.

Now I'm going to caveat this with use good tax software because sometimes tax software can be a lifesaver when it comes to navigating complex tax situations.

But like I told you, I got to be honest with you, I've not found too many online tax software programs that really do well for the individual doing their own taxes. So be wary of those. Another thing I'm going to recommend you do is what we've talked about several times now is seek professional help.

You might be thinking, wow, Ralph, that's self serving to you. Yeah. But here's the thing, this can be overwhelming. The complexities of multi state taxation can drive you crazy.

And trust me, these are things that reverberate and reverberate. Like I said, that client that was working in Texas and didn't realize he needed to file Delaware, he ended up owing over $20,000 in tax to Delaware.

And that became a nightmare. He had to set up a payment plan with them and they nailed him with penalties, they nailed him with interest, they attached his wages.

It became a whole thing.

So that's why I'm going to recommend go find professional help because they can provide personalized guidance and that's the key to this because everybody's situation is different and they can ensure you're meeting all your obligations. Now listen, if your employer doesn't have a clear policy on multi state tax withholding, this is where you got to be proactive.

I said this, you got to self report your work locations and residency information because that's going to help you ensure that the taxes are withheld correctly and prevent any surprises at tax time. Just like Lewis did, he diligently manages his taxes just like we need to do.

As Christians, we should always be mindful of our financial obligations before God. Now maybe you're wrestling with complex tax obligations across different states.

Whether you're a remote worker, you're a business owner, maybe you're a business owner, you're not sure how to handle it because you do work in multiple states. Or maybe you're split in time between residences. You don't have to navigate this tax maze alone.

Like many others, you might be unsure which state taxes require tax returns. You might not know about those nine states that don't have, that don't have income tax.

Maybe you're confused about tax credits and what deductions you can take across states. Maybe you're worried about that double taxation that we talked about or you're struggling to track income sources in multiple jurisdictions.

But I'm going to tell you friends, there is a solution. Working together, I'll help you bring clarity to your multi state tax situation while making sure you're in full compliance.

And here's how we're going to help. I'm going to sit down with you. We're going to analyze your residency status in each state.

We're going to understand exactly what, what we're working with, where you live, what state you work in and what the rules are between those states. We're going to make sure that your employer will look at your pay stubs, make sure your employer is withholding the right taxes.

We're going to review your income sources and your tax obligations.

We're going to look for tax credits, we're going to look for those reciprocal agreements and then I'm going to help you build a comprehensive tax strategy because this really can optimize your state income taxes, their state specific deductions, and then I'm going to help you because I'm going to help you monitor any changing laws. And you think about it, all the things I just mentioned, that's not generic advice.

You're not going to get that by going online and doing a Google search. You need expert guidance tailored to your unique multi state situation. Because here's what you want to say, here's what you're really thinking.

Ralph, I want to minimize my tax liability. I want to make sure I'm compliant, I want to maximize deductions and I want to prevent costly mistakes.

Now listen, don't risk penalties or overpayment due to complex multi state requirements. You can book a consultation with me. Go to askralph.com when you get there.

At the top of the screen you'll see a button that says book a call with Ralph and let's work together and let's optimize your multi state tax strategy and save you all kinds of money. Now you know, a few days ago I also added a point in this show we're going to do some reflection. So here are my three reflection questions for today.

Number one thing, have you been keeping detailed records of the days you work in different states? If you're one of those people that finds himself, maybe you're listening to this because you're in that situation. Here's what I'm going to do.

First thing, make sure you're keeping detailed records. The second thing, I'm going to strongly encourage you.

If you have friends or family or people that you work with that don't understand this, do me a huge favor and share this episode with them because it's going to save them a ton of headaches, it's going to save them a ton of penalties and interest and all those type of things. So that's number one, keep those detailed records. Number two, are you aware of any tax reciprocal agreements between your home state and work state?

Maybe your employer doesn't even get it. They don't understand it. You don't need to be doing this or they're doing it wrong.

Like that client I had that was working in Pennsylvania and living in Maryland and is an employer was withholding the wrong state. So that's number two, understand those tax reciprocal agreements.

And number three, how might you better organize your tax documents to reduce your stress during tax season? And we're right there. We're on the cusp of getting ready to start filing returns.

And my goal as your financial evangelist is to try to reduce the stress that you have and reduce that friction. Now listen, here's my action steps for today because navigating multiple state taxation can seem daunting. But it doesn't have to be that way.

If we plan it carefully and we make attention to detail, it's manageable. So here's A few key takeaways and some of these going to sound like a repeat. But I always like to end the show with some action steps.

Understand those state tax reciprocal agreements. It is imperative be aware of the potential financial impacts of working across state lines.

Understand, if you're in that situation where one tax rate is lower than the other, you may end up owning that other state. Which leads me to the next thing. Keep accurate records of your income and expenses. Even if you can't use those expenses, keep track of them.

And when you go meet with your tax professional, go get and have them use it. Which leads me to the next thing. Seek professional guidance if you need it. And like I said, I think online tax software is fine.

But let me tell you, if you're not listening to me at all, listen to what I'm getting ready to say to you. It does not do a good job with state tax returns. It just doesn't. And last but not least, remember your biblical responsibility to be a good steward.

That's what we started the show talking about. The listener wanted to know, how can I maintain my biblical responsibility and pay unto Caesar? What's his doing to Caesar?

If you owe taxes, pay taxes. Because like I said, it's more than just doing it for that purpose. You're doing it for a godly purpose.

Now, tomorrow's show, we're going to change topics completely and we're going to talk about ways to distribute wealth to your heirs to prevent tax issues. This is a question I got from a friend and a client of mine named Bob.

And Bob's getting up there in age and he asked me a very specific question about what do I do, Ralph, with setting up myself to prevent taxes for my heirs when I pass away? So I'm going to answer that on tomorrow's show. Remember this as I close, my passion is to help you achieve financial success.

I want to see you live out your dreams and I want to see you grow in your faith.

And I know working together, and I've probably said that a few times today, these state tax issues are complicated, but working together, we can master your finances and we'll maintain that Christian perspective. So as I always end the show, stay financially savvy out there and may God bless you.

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