Multistate Taxation: The Myth and the Undermining Reality

Almost everything is taxed, from groceries to property, and the picture gets more complicated when you move from your home state to another state for a new job or a temporary project. Tax rules differ from state to state in the U.S., and there are common misconceptions about how multistate taxation works. This article sets out six myths and the facts behind them.

Multistate taxation generally turns on two terms: resident of the state and non-resident of the state.

Do residents pay state tax when they live elsewhere?

Myth 1: Permanent residents don’t have to pay taxes when they don’t live in the state.

Fact: Permanent residents of a state still pay taxes there even when they don’t live there.

This is one of the most widespread myths. Every state sets its own rules for people who file as permanent or temporary (project-based) residents. If you live in Connecticut and work in New York, you owe tax to Connecticut under its rules and to New York, where you work, under New York’s tax brackets for that income.

However, the tax you pay to your work state is credited against what you owe your home state. In other words, Connecticut cannot tax you a second time on the income you have already been taxed on in New York.

What income do non-residents pay tax on?

Myth 2: Non-residents of a state are taxed on many kinds of income besides their earnings.

Fact: Non-residents are taxed mainly on the income they earn in the state.

People who stay in a state only to work, or for a temporary project, pay tax on the income they earn there rather than on their investments. For example, if you are a California resident working in New York City, your New York return will mostly cover your income from work there, not your other investments. Permanent residents of New York City are treated differently. Note, however, that you still have to file a return as a non-resident if you sell property in the state.

Do students have to pay taxes?

Myth 3: Students don’t pay taxes.

Fact: Students may have to file and pay taxes too.

It doesn’t matter whether you are a student or a working professional. Anyone who earns income may owe tax, whatever their age or role, and that includes students who earn and study in more than one state.

International students in F-1 or J-1 status are generally treated as non-residents and must file. Form 8843 is used by these students, and those with U.S. income file Form 1040-NR. The simpler Form 1040-NR-EZ was discontinued starting with tax year 2020. Form 1040-NR can now generally be filed electronically, and many universities’ international student offices give students access to tax-preparation software that produces the forms they need.

When is the tax filing deadline?

Myth 4: There is no fixed time to file taxes, even if you live and work in one place.

Fact: The filing deadline is generally April 15 each year, and filing late can be expensive.

This applies to residents and non-residents who work in a state. The tax year runs with the calendar year, starting on January 1, and the return for it is generally due by April 15 of the following year.

It is not a good idea to file before you have all the forms that relate to your income. Employers must issue Form W-2 by January 31, and Form 1042-S must be furnished to recipients by March 15. The IRS expects these dates to be followed.

Is Form W-4 used to file a tax return?

Myth 5: Form W-4 is for filing tax returns.

Fact: Form W-4 only tells your employer how much tax to withhold.

A common belief is that Form W-4 is the final form for filing your return. In reality, it gives your employer the details needed to work out how much to withhold from each paycheck. It is not a tax return. It does, however, save your employer a lot of work by giving the exact information needed to calculate withholding.

What happens if you don’t file on time?

Myth 6: Not filing taxes doesn’t cause any problems.

Fact: Filing late can lead to penalties and large charges.

Some people believe it is fine not to file at all. The IRS does not agree. If you don’t file on time, you can face penalties and interest charges that add up quickly. Late filing can also lead to an IRS audit and, for foreign nationals, can affect future visa applications. Tax-preparation tools can help you file correctly and catch up on returns from earlier years that you have not filed.

Filing on time saves you from penalties and charges you never expected to pay. Following IRS and state tax rules helps make sure you pay only the tax you actually owe. Federal and state rules on multistate taxation change from time to time, so it is worth checking the current requirements each year before you file.