Contributed by: PhillipB TaxPro FreeTaxUSA Team
Generally, residents pay state tax on all income they earn regardless of where the income is earned, while nonresidents only pay state tax on income that is sourced from the nonresident state.
- Common state-source income can include some of the following items:
- Wages earned while physically working in the nonresident state.
- Trade or business income earned while operating a business in the nonresident state or for contract work performed in the nonresident state.
- Rental or royalty income from real estate or other property physically located in the nonresident state.
- Income from pass-through entities operated in a nonresident state.
- Gains or losses from the sale of property connected to the nonresident state.
If you need to file, you may be asked to allocate federal income, adjustments, and possibly deductions between your resident state and the nonresident state. To allocate the income follow these steps:
Continue the nonresident state return until you reach a screen that lists different income items from your federal return with a column to enter an amount for that state.
Go through each of the income items. For example, since wages will usually report state wages for the state where the income was earned, this screen will tell you how much was reported as income for that particular state. In some cases, the amount we tell you is the amount that you enter in the state column. However, if the amount is equal to your total box 1 federal wages and you did not work the entire year in that state, you may need to allocate the amount by the number of days you physically worked in the other state versus the number of days you worked in your resident state.
Most of the income items that are not from earned income or business income will not be taxable income to a nonresident state and you can allocate zero to the nonresident state.
If there is Schedule C business income, you will need to allocate the portion of net income from the nonresident state. For example, if the business has 100,000 dollars of gross income and you had a 10,000-dollar 1099-NEC from work in a nonresident state, you will allocate 10% of the net income or loss to the nonresident state.
You may also need to allocate a similar portion of the adjustments for half of self-employment tax, the self-employed health insurance deduction, and self-employed retirement contributions.
Income from pass-through entities located in the nonresident state are taxable in the nonresident state.
The pass-through entity may pay tax or withhold tax on your behalf. Depending on the state, you may need to claim a credit, addition, or subtraction on the nonresident and the resident state for these tax payments.
The state law of each individual state will govern how income, adjustments, and deductions can and should be allocated. It is a good idea to review the nonresident states allocation or apportionment directions in the nonresident tax return instructions.
