In many countries, local taxes are assessed separately on regional, municipal, and prefectural levels.The United States is no exception. In the United States, taxpayers must file an annual federal tax return and file a separate state tax return. In many cases, state tax laws are similar to federal tax laws. Nevertheless, as state income taxes are based on autonomous state law and administration, you will find that concepts in federal taxation are often not applicable to state tax reporting.

State tax rates vary by state. For example, the state of New York has the highest marginal income tax rate, 8.97% for individuals. On the contrary, states like Florida, Nevada, Alaska, Texas, Washington, Wyoming, or South Dakota- do not tax individuals on their income at all.[1]

People often find it specifically challenging when they have to apply two different sets of state rules for their tax reporting. In fact, it is not uncommon for a U.S. taxpayer to reside in one state and work in another. To illustrate this tricky multi-state tax reporting situation, take a look at a few hypothetical cases. These cases illustrate the complications that can occur when two separate sets of state tax overlap.

Case 1:

Q: I am a resident of New Hampshire, but work in Massachusetts. New Hampshire does not tax individuals for their earned income, but Massachusetts assessed 5.3% tax on an earned income. As a NH resident, am I still subject to MA income tax reporting requirements?

A: Yes, you are. Since the source of your income is from Massachusetts, you have to file a MA tax return as a non-resident of Massachusetts, and pay applicable taxes. As for New Hampshire, you are not subject to file or pay tax on your Massachusetts earned income in the state of New Hampshire, since your home state does not assess income tax on an earned income.

Case 2:

Q: My spouse is living in Virginia and works in the District of Columbia. Does she have a different case from mine?

A:Virginia and District of Columbia are adjacent localities, and they have established a State Reciprocal Income Tax Agreements (reciprocity). As long as your spouse properly filed her exemption form with her employer and certified that she was not a resident of DC, she will not be subject to filing or paying requirements on her DC earned income to the DC government. Instead, she will have to include all of her DC earned income into her VA tax return and pay taxes in Virginia.

Case 3:

Q: Next year, I am planning to live in New Jersey and work in New York. I understand that both states have individual income taxes. Do I need to pay taxes in both states?

A: Yes. There is no reciprocity between the two states. You will have to file a tax return in NY as a non-resident and pay applicable taxes. As a resident of NJ, you will also have to file and pay taxes in NJ. However, New Jersey will allow tax credits to offset your tax burden in New Jersey, in order to minimize the effect of double taxation.

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[1]Individual Income Tax Rate at the state level is available at

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