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You may be tired of dealing with multi-state tax compliance. If you are under the threat of double taxation and penalties, it can be a severe headache. Crossing state lines when working is a sure trainwreck of taxes gone wrong. This episode of the Ask Ralph Podcast with Ralph Estep Jr. is here to untangle your web of multi-state tax obligations. How do you navigate when you work in multiple states to avoid double taxation and penalties? With Ralph Estep, Jr.
In Episode 186 of the Ask Ralph Podcast, with your host Ralph Estep Jr., you will hear how to stay out of being taxed twice on your earnings and what kind of records should help save from going through an audit process as well as common errors which could lead to penalties if you are not safe. You will want to experience this episode as you gain resources for emerging victorious with confidence in your multi-state tax situation! Well your entire questions will be answered by Ralph and make you understand this prurient for once. Do not be taxingly alone; let Ralph show you the way to multi-state compliance and serenity.
00:00 Episode Overview
00:21 Recap And Show Announcements
02:06 Bible Verse
02:37 Why will you owe state income taxes where you worked?
03:42 Why will you also owe state income taxes where you lived?
04:14 How may you claim a tax credit?
05:02 How can you determine your state residency status?
05:36 Why should you adjust withholdings or make estimated tax payments?
06:24 How can you file nonresident returns properly?
08:07 Why should you track time spent in each state?
08:59 Why should you pay close attention to retirement contributions?
08:46 Why should you consider the impacts on property and investments?
09:17 Why is it important to maintain good records?
10:49 Outro
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Ralph Estep Jr.:
Have you ever worked in one state but lived in another? Truth is, that can create a tax nightmare if you don't handle it properly. This is a question I get asked all the time and the answer might surprise you. So stay tuned to find out how to avoid double taxation and make sure you file correctly when working across state lines.
Ralph Estep Jr.:
Welcome faithful listeners to another episode of the Ask Ralph Show, where we explore finances from a Christian perspective. I'm your host, Ralph, and today is tax talk Thursday, one of my favorite topics to dig into. Before jumping into the main discussion today of handling taxes when you work in multiple states, I want to wish all of my American listeners a very happy 4th of July!
Ralph Estep Jr.:
On this Independence Day, let's remember the blessing of living in this great nation and the sacrifice of those who fought for our freedom. God has truly shed his grace on America and may we continue to be that shining city on a hill for the world. I can still remember the first time I heard that. I think it was our former president, Ronald Reagan.
Ralph Estep Jr.:
All right. Well, let's talk taxes. I know this isn't the most exciting topic, but it's so important to get it right. The last thing you want is to face an audit or get hit with penalties for incorrectly filing when you worked in multiple states. I'm going to walk you through exactly what you need to know step by step. But first, let's do a quick recap of yesterday's episode on whether your side hustle is actually illegal.
Ralph Estep Jr.:
We covered how to make sure your side business complies with all state local regulations. I gave you some tips on business licenses, zoning laws, and restricted covenants that could trip up an unwary entrepreneur. If you missed that info, be sure to go back and listen so you can keep your side hustle clean and avoid any trouble down the road. And none of us wants that.
Ralph Estep Jr.:
You'll find all our episodes at askralphpodcast.com. And make sure you tune in tomorrow when we tackle a common question I get asked and that is "Ralph, should I invest in precious metal IRAs?" We're going to explore the pros and cons of gold and silver so you can decide if it should be part of your retirement investing strategy. Great stuff coming your way. But for now, let's get into today's multi-state tax talk.
Ralph Estep Jr.:
Let's start as we do what today's Bible verse. This comes to us from the book of Proverbs 3:9. It says this, "Honor the Lord with your wealth and with the first fruits of all your produce." As Christians, it's important that we honor God by being good stewards of the money he's entrusted us with. Part of that is making sure to pay the taxes we rightly owe, whether we work and live in one state or multiple states. Paying our taxes properly demonstrates integrity and it demonstrates responsibility.
Ralph Estep Jr.:
All right. You're working in one state but living in another. Maybe your job is based in California, but you live across the border in Arizona. Or your company is in Texas, but you reside in Louisiana. Whatever the case, working in one state while living in another creates obligation in both states. So here's what you need to know.
Ralph Estep Jr.:
Number 1. You'll owe state income taxes where you worked. The state where you physically perform work can tax your income earned in that state, even if you live somewhere else. For example, let's say you work in California, but live in Nevada. You'll owe California state income tax on the wages you earn there. The basic rule is you pay the state income tax in the state where you worked, regardless of where you live.
Ralph Estep Jr.:
Some states have reciprocity agreements that allow you to pay only where you reside, but generally the work state gets a cut. For example, if you work in Pennsylvania and live in Maryland, these two states have what's called a reciprocal agreement. So you only pay taxes where you reside. Now we're here in Delaware. Delaware has no reciprocal agreements. So that makes things pretty interesting here.
Ralph Estep Jr.:
Move on to number 2. You'll also owe state income taxes where you live. Here's the double whammy. On top of owing state income tax where you worked, you also have to pay state income taxes where you live. Your state of residence can tax all of your income regardless of where you earned it.
Ralph Estep Jr.:
So going back to our example, if you live in Arizona but work in California, Arizona can also tax the wages you earn in California, along with any other income. You end up paying state income tax twice on the same earnings. Ouch. "Ralph, are you kidding me?" Well, just keep listening. I'm going to come back to that.
Ralph Estep Jr.:
Number 3, you may be able to claim a tax credit. Here's some good news. Most states allow you to claim a credit for taxes paid to the other state to avoid that double state taxation. But this often doesn't eliminate the burden completely. For example, if you lived in a state with a 5% income tax, but worked in one with an 8% tax, you calculate what you owed to each state. You paid a full 8% to the work state but could claim a credit for the amount on your home state return to offset the part of what you owe. I might just confuse you there.
Ralph Estep Jr.:
But basically, what I'm trying to say is you might only end up paying 3% more to your home state. The moral of the story is, you can usually avoid paying double state taxes, but will still over a little extra. And this is the place where you want to consult with a tax pro and read up on the specific rules in each of those states.
Ralph Estep Jr.:
Let's move on to number 4. And this one's important. Determine your state residency status. Some people try to claim they aren't residents of the state where they live to avoid owing taxes there. But most states have rules about what makes you a tax resident, often based on how much time you spent there. For example, you may be considered a resident if you live in a state for more than half a year or use it as your primary place of abode.
Ralph Estep Jr.:
They're going to look at your driver's license. That's a big one there. So you need to check each state's specific laws to determine your residency status for tax purposes. This is really not a wise place to play games. You'll lose in the end if you're not careful.
Ralph Estep Jr.:
Let's move on to number 5 and that's adjust withholdings or make estimated tax payments. And this is all about avoiding penalties. You need to properly pay taxes during the year through withholding or estimated payments. Since your income is subject to tax in two states, determine how much you'll owe overall and adjust withholdings on your W-4 forms accordingly. You may even need to make estimated tax payments to one or both states to avoid that underpayment penalty.
Ralph Estep Jr.:
This is where I'm going to say again, work with a tax pro to run the numbers and ensure you pay enough throughout the year, especially in your first year working in a new state. I deal with this issue all the time in my practice. And I often have to convince clients to pay those home state estimated taxes in order to avoid that nasty penalty when filing. You know, I try to stress this to them. I try to talk to them about it. Sometimes they don't want to hear me, but that's really what you want to do.
Ralph Estep Jr.:
Let's move on to number 6 and that's file non-resident returns properly. When you live and work in separate states, you'll be filing tax returns in both places. Each state has its own non-resident forms and instructions. So obtain what you need from each revenue department and follow the guidance closely to ensure you calculate income correctly and claim any allowable deductions. Doing non-resident state taxes yourself can be tricky. So you want to consider having a tax preparer handle it if you want to be safe.
Ralph Estep Jr.:
They'll know all the ropes of each state. I've seen many online tax preparation sites really mess this up and I've corrected more returns than I care to recall involving these multi-state issues. So if you take nothing else away from today's show, do yourself a huge favor and hire a tax pro to help you. In case you're wondering, I do prepare taxes in all 50 states. Assume they have state income tax, you're welcome to schedule a tax prep appointment with me. You do that right on our website. Again, that's at askralphpodcast.com.
Ralph Estep Jr.:
Let's move on to number 7. And this one is vital. Track time spent in each state. Some states tax you based on the number of days you are physically present during the year. So be sure to keep a log of any business trips, travel to see family, et cetera, anytime you weren't in a state and use a calendar to know which days you were in each state. That provides documentation if you need to establish or challenge residency claims. Apps like TripIt can help with tracking as well.
Ralph Estep Jr.:
And here's an aside, if you also happen to work in a city which imposes income taxes, these records may very well lead you to a refund if you don't spend all of your time working in the city. Here in Delaware, many clients who technically work in the city of Wilmington but spend days working outside the city. So we're able to request a partial refund of those city taxes for those days working outside the city. Now that's a pro tip you can use.
Ralph Estep Jr.:
Let's move on to number 8 and that's pay close attention to retirement contributions. If you contribute to a Roth IRA, you're going to claim the deduction on your resident state return. If you make traditional IRA contributions, they're likely deductible in your work state return. This gets complicated in some states where they may not give you a deduction for retirement contributions. So this is another place where enlisting a tax pro will help.
Ralph Estep Jr.:
You also need to be careful of exceeding state deduction limits. Tax pro can help you properly allocate retirement contribution deductions between your resident and work state returns. Not all the states are the same. So you really need to understand what you're dealing with.
Ralph Estep Jr.:
Let's move on to number 9 and that's consider the impacts to property and investments. Owning property in one state while working in another can also muddle your tax situation. You might owe taxes in one state for investment earnings while taking itemized deductions related to property tax and mortgage interest in the other. You got to run all the scenarios of how dual state taxation could impact your overall tax picture. You need to weigh factors like property tax rates, income tax rates, deduction limits. You want to really minimize your multi-state tax burden.
Ralph Estep Jr.:
And finally, number 10, if you listen to the show, you know I talk about this one all the time, maintain good records. Keeping accurate records is crucial when dealing with taxes in two states. You want to keep those pay stubs, the W-2 forms, proof of withholding, estimated payments and logs of time spent in each state. Strong documentation protects you in case of an audit and provides support if you need to demonstrate residency claims.
Ralph Estep Jr.:
Organization here is the key. Navigating taxes in two different states can get hairy, but following the tips I just outlined will set you up for success. The key is understanding where you'll owe state income taxes, properly adjusting your withholdings, documenting your time spent working and living in each state and correctly filing those non-resident returns.
Ralph Estep Jr.:
The moral of the story is don't ignore your multi-state tax obligations, or you could end up with penalties and extra taxes owed. Nobody wants that. It's vital that you take control of the situation from the start.
Ralph Estep Jr.:
Now I'm going to remind you this. Visit askralphpodcast.com to get more tax tips and sign up for my email list. You'll get my book, Mastering Your Finances. It's actually free. That's a great deal. Consider if you bought it on Amazon, it costs you 10 bucks. And just for signing up to receive episodes delivered straight to your inbox.
Ralph Estep Jr.:
This book is 47 pages, but it's going to impact your financial life. If you enjoy this multi-state tax talk, do me a favor and share it and leave a review for this show. share this episode with any friends who work and live in different states. And let me know what questions you have about your situation. I'm always here to help.
Ralph Estep Jr.:
As I always say, this is your show and I absolutely love answering your questions. Again, I wish all of you a very happy Independence Day. And let's take a moment to thank God for his blessings on our country and those who truly sacrifice it all for the freedoms that we all take too often for granted. As I close, remember, stay financially savvy and God bless you abundantly.
