How Do I File Taxes in Two States?

Sometimes, you might find yourself moving across the country for a job or setting up a business in a neighboring state. In these cases, you might need to file taxes in two states. While some states don't collect income tax, you will still have to pay self-employment taxes for any 1099 income you earn.

Filing taxes in two states as a permanent resident or nonresident

There are three ways you can file taxes in two states: as a resident, nonresident or a part-time resident. The rules are different for each case, and you can find them on your state’s website or ask a tax pro to help.

If you live in California but spend the summer in Texas on vacation, you will only need to file California taxes, as you’re still considered to be a resident of California even if you didn't necessarily live there the entire year.

But what if you moved to Chicago in June and stayed there for the rest of the year? In that case, you’ll also be considered a resident of Chicago and will need to file state taxes according to Chicago rules. This is because you would have lived over 183 days in Chicago and would be considered a resident of that state.

Filing as a nonresident is only expected when you receive income from a state you don't live in. Say you own a small coffee business in Oregon but live in Idaho. The IRS would expect you to file taxes as a nonresident in Oregon and as a resident in Idaho. As you’re self-employed, you can use a 1099 tax calculator to find business deductions to lower your tax liability.  If you own rental property outside the state you live in, you will need to pay taxes on the rental income according to that state’s rules.

There is a way you can avoid this – a reciprocity agreement. With this deal in place, you generally only pay state income taxes where you live, simplifying the process. So, instead of dealing with double taxation, you can focus on just one state for your income tax obligations. It's a practical way to make things less complicated when working across state lines.

Each state with reciprocity agreements has different form submission requirements, so make sure to do your research. You should also keep records of your time spent in each state and all your income documents for  when you file.

Filing taxes in two states as a part-time resident

Filing multiple state tax returns may become necessary if you've lived in different states within the same year, even when working remotely. Imagine you lived in Colorado for several years but decided to make a move to Arizona in August 2023, intending to make it your new home. In this case, you'll likely find yourself filing part-year resident tax returns with both states when you file taxes for the 2023 tax year.

If you “establish domicile” in a certain state, you can call it your permanent residence. This way, you can avoid paying taxes in two states even if you work in a state you don’t live in. However, if you meet the 183-day rule, you’ll have to file two returns.  

There are a few things you can do to establish domicile and prove to the IRS you intend to stay where you are:

• Updating your driver’s license to your permanent resident state
• Register to vote
• Buy or rent property
• Join a social or professional community group
• Registering your vehicle with the state’s DMV
• Changing your main bank accounts to the permanent resident state
• Have proof of employment in the domicile state

If you’re self-employed, FlyFin’s expert CPA team can help. Navigating filing taxes in two states can be complicated as every case differs. You can get unlimited tax support (even with preparation and filing), and A.I. finds all your business deductions to lower SE taxes.