Do I Need to File a State Tax Return for Rental Property in Another State

What are the Tax Requirements in Reciprocal States?

There are states that permit residents from other states to work without filing nonresident tax returns. Often, this is the case with neighboring states where living in one state while working in another is a regular occurrence. These arrangements are known as reciprocal agreements. If your state and the state you work in have reciprocal agreements then you’re likely not going to need to file a tax return. These agreements, however, tend to only cover income you get from actual employment. Other forms of income still necessitate a return.

As of 2019, 16 states plus Washington DC have reciprocal agreements with at least one other state. The following are work states:

  1. Arizona
  2. Illinois
  3. Indiana
  4. Iowa
  5. Kentucky
  6. Maryland
  7. Michigan
  8. Minnesota
  9. Montana
  10. New Jersey
  11. North Dakota
  12. Ohio
  13. Pennsylvania
  14. Virginia
  15. West Virginia
  16. Wisconsin

Check the state authority in your work state or your office’s HR department to make sure you’re meeting all your tax obligations because reciprocal agreements are known to change.

Will I be Paying Taxes Twice?

Even if your state doesn’t have a reciprocal agreement you won’t pay state taxes twice. Luckily, the U.S Supreme Courts May 2015 ruling in Comptroller of the Treasury of Maryland v. Wynne et ux states that you cannot be legally taxed for the same income by two states.

For over six months the justices debated and listened to oral argument before settling on a 5-4 outcome that states cannot tax earnings and other revenue streams that had already been taxed somewhere else. The decision was a big deal because it cost some states a lot of tax revenue.

When Must I File a Nonresident Tax Return?

You have to file a nonresident return in the state in which you work if there’s no reciprocity, but you won’t have to pay any taxes. Your home state will provide you a tax credit or some means of adjustment for the taxes you’d pay to other states.

The reciprocal agreement doesn’t automatically get applied. You have to fill out a form that’s specific to your work state with your employer to make sure the taxes owed to your work state aren’t withheld from the pay you earn. If you don’t fill out one of these state-specific forms then you’ll have to file a non-resident tax return.

You also have to file a nonresident return if you had state taxes withheld by your employer for the wrong state and need a refund from that state, or if you generated some non-employment revenue in a state other than your own.

What is Non-Employment Income That’s Taxable to Nonresidents

You don’t have to work in a state to owe that state taxes. Most states will tax any revenue that’s sourced to their state, even if you’re not a resident. So, keep the follow situation in mind because they’re going to merit filling out a non-resident tax form.

Income as a partner in an LLC, partnership, or S-corporation

If you’re just an employee of the company then you don’t have to worry. But if you’re a partner, then your share can be taxed in the state in which the company is rooted.

Income from services performed within the state

If you’re a plumber who crosses state lines to replace a water heater then you’re going to have to file a non-resident form.

Lottery or Gambling Winnings

Where ever you won is where you’ll have to file a return.

Income from the sale of property

If the asset you sold or the rent you collected was in another state then you’re filling out a form there.

Real Estate Investment

How to file One or More State Returns

These days, you can use eFile to send in your tax documents to the IRS using the internet or a direct connection. Tax preparation software even comes with eFile compatibility.

In 2018, 89% of tax returns were filed electronically, so you won’t be the only one using it. You have to use a third party to e-file, though, and you can’t eFile directly through the iRS’s website.

The IRS lists all the approved eFile options, which have to secure approval every year. In the name of fairness, the IRS changes the order in which providers appear on the IRS website every day.

Start with the Federal Tax Return

At the start of the new year you’ll be able to fill out and eFile your federal and state taxes for the previous year. Since state agencies depend on federal tax returns to verify state tax returns, you can’t only submit one or the other. You have to submit both federal and state tax returns. That’s just how it works. Luckily, they contain much of the same info, so don’t worry about doing double the work.

Review State Laws

You have to file past-year resident taxes for every state you lived in. This is the case even if you moved from one state to another. eFile.com is built in such a way that when you file your state tax returns it’ll help you use information from the federal tax return you already filed. This way you save time.

Each state has its own designated tax forms, so select your state either on the website or software you’re using to fill out your taxes. If you’re going the physical route, you will be able to print the laws governing your state taxes from wherever you download your tax forms. If you pick up a physical form to fill out at designated location, such as your local library, the state laws will be available there as well.

Complete a non-resident State Tax Return

Next, file a non-resident tax form for every state you earned money in. Don’t worry about where your employer is located if you don’t work in that state.

Prepare a Tax Return in Your Home State

By now, you’ve collected most of the information you need in order to fill out your home state tax return. So, there’s very little work left to do!

Bottom Line

You’re not going to get double taxed but you do have to fill out additional forms if you make any sort of income in a state other than the one you live in.

Luckily, advances in technology have made filing easy, and the tax code has been adjusted to be more accommodating to people who earn money in multiple states.

It’ll require extra work to fill out the forms, but an afternoon of research and computer time is worth it if it means saving you the hassle of further engagement with the IRS!

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