Living in One State, Working in Another: How to Avoid State Tax Traps

People who live in one state but work in another can feel caught in a tax tug-of-war. Both states may have a legitimate claim to the income taxes — the first state because that’s where they reside, the second because that’s where the money was earned.

That means there’s a potential for double taxation. Fortunately, some states have taken steps to mitigate the possibility. But…other states have not.

If you’re living and working in two states, here is how you might fare during any tax season.

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When one state has no income tax

If you live or work in a state without personal income tax, your filing process may be significantly simplified. Why? You generally only need to file one state tax return in the state that taxes income.

Currently, here are the nine states that don't tax personal income.

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington*
• Wyoming

*Note: As Kiplinger reported, Washington has a capital gains tax that hits some very high earners, even though the Evergreen State doesn’t have a personal income tax.

As an example, however, take Washington and Oregon. Washington doesn’t have a personal income tax, but Oregon taxes personal income as high as 9.9%.*

So if you were living in Washington and working in Oregon, you'd file an Oregon income tax return for the money you earned in that state, and only that state.

That’s important. If you earned money from your side hustle in Washington, that income typically isn’t included on your Oregon return. It’s tax-free.

Tax reciprocity can be sweet: How to file in only one state

If you live and work in states with reciprocity, that could be good news come tax time. Reciprocity means each state gives up the right to tax income that it would otherwise be entitled to.

Reciprocity can be bilateral or unilateral.

Bilateral reciprocity is usually achieved through an agreement between two states that impose income tax. Say you live in Pennsylvania and land a job in Maryland. The two states have a reciprocity agreement. That means:

• Pennsylvania will tax your income, not Maryland.
• Your employer should withhold only Pennsylvania income tax.
• In the reverse living situation, a Pennsylvania employer would withhold Maryland income tax.

Here, you only have to file one state return: Pennsylvania.

Unilateral reciprocity is where a state’s reciprocity is contingent upon the second state’s giving the same treatment to the first state’s residents. For example, Indiana will generally exempt non-Indiana residents from Indiana income tax if they’re from a state that gives the same tax-exempt treatment for Indiana residents.

Montana, on the other hand, takes a narrower approach. The Big Sky State will enter into reciprocity agreements only with states that border it. Even then, Montana has just one reciprocity agreement with its immediate neighbor, North Dakota.

• Right now, 16 states have entered into reciprocity agreements with other states, primarily located in the East Coast’s Mid-Atlantic region and the Midwest.
• But reciprocity agreements can end, and if they do, you’re in the same boat as if they’d never existed.
• For instance, Minnesota and Wisconsin ended their 40-year agreement in 2010. However, after years of negotiation, the two states restored their reciprocity agreement starting in 2025. Residents commuting between these states can once again simplify their filings to just their home state.

No reciprocity? Prepare for the 'two-return' tax headache

If there’s no reciprocity between states, that’s when the tax headaches often begin. You have to file two state income tax returns:

• A nonresident return to the state where you’re employed (reporting only income you earned there), and
• A resident return to the state where you live (reporting all income).

Depending on the type of job you have, you might have to file even more nonresident returns. For instance, imagine you sell heavy equipment in a four-state territory, and none have reciprocity agreements — that's four returns.

This means you must keep track of which states you visit during the year and the length of each visit. Then you calculate the taxes due to each state and complete your returns. It’s standard practice (but not required) for your home state to give you credit for taxes paid to other states.

Additionally, in most states, you are liable for income tax on your very first day. However, states often have a grace period before a tax withholding requirement kicks in. That means your employer isn’t paying tax from your paycheck — but you could still owe income tax.

Here are a few examples of states that have a delay in tax withholding:

• Arizona grants 60 days
• Louisiana grants 25 days
• West Virginia grants 30 days

Convenience of the employer rule

Some states, like Connecticut, New York, and New Jersey, employ the "convenience of the employer" test. Under this rule, if your employer is in one state and you work in another for your convenience, the employer's state can still tax your income.

For instance, if you live in New Jersey and work in New York, here's how the "convenience of the employer" rule could look:

• If you live and work for your New York employer in New Jersey because that’s more convenient for your employer, New York won’t tax your income.
• But the working arrangement has to be more convenient for the employer, not the employee.
• If New York decides the arrangement is more for the employee’s benefit, the employer must withhold tax from the employee’s income.

Here’s a real-life court case. Zelinsky, a law school professor in New York, commuted to New York from his home in Connecticut and worked on school-related tasks in Connecticut twice a week. New York demanded taxes from the days Zelinsky worked in Connecticut. The professor argued that working from home on those days was necessary for his duties at the law school. New York countered that the professor’s employer didn’t require him to work in Connecticut, and that’s the standard for the convenience of the employer in New York.

The verdict? New York won the lawsuit, and Zelinsky had to pay New York income taxes for the days he worked in Connecticut. The case is In re: Zelinsky, 3 No. 129 (N.Y. Ct. App. November 24, 2003).

Zelinsky is an old case, but it still applies. If you’re a graphic designer living and working in New Jersey in 2026 while employed by a graphic design company in New York, unless you can show your employer wouldn’t accommodate you in New York, the state will tax your income.

Six states currently apply some form of the convenience of the employer rule:

• Connecticut
• Delaware
• Nebraska
• New Jersey
• New York
• Pennsylvania (*Note: Pennsylvania has a reciprocity agreement with Maryland)

Note: Two states, Connecticut and New Jersey, have mirror reciprocal rules; that is, both states will apply their convenience of the employer rule if the other state (like New York) does first.

Remote work tax rules

Remote work state income tax rules can be similar to living and working in a single state. For most remote workers, you are generally taxed based on where you are physically performing the work, not where your company is headquartered.

• A single tax return in the state of residence is usually all that’s needed.
• No state return is required if the employee lives in a state with no income tax, like Tennessee.

And if the two states have a reciprocity agreement, like Ohio and Kentucky, the employee is taxed in the state of residence.

However, double taxation can arise in states that follow the convenience of the employer rule. The state where the employee lives claims the right to tax based on residency, and the employer’s state claims the right based on the employer’s location. The remote employee escapes double taxation if the employee can show it’s necessary (e.g., the employer’s cost considerations) for the employee to work remotely.

Hybrid work tax rules

A hybrid employee works from home part of the time, so their tax situation can look a little different from that of a fully remote worker.

For example: Assume an employee who usually works two days a week in their home state goes to their employer’s office in a second state three times a week.

• If the employee lives and works in two states with a reciprocity agreement, the employee is taxed in the state of residence.
• If the states don’t have a reciprocity agreement, the employee divides income in the same way as an employee who physically lives and works in two different states.

But like with fully remote employees, there’s the specter of double taxation when one or both states follow the convenience of the employer rule, unless the employee can show there’s a legitimate business reason for the employee to work remotely.

So if you’re living and working in two states and facing the possibility of having your income taxed by your state of residence and your state of employment, talk to a tax professional about your options.

Read More

• Are No Income Tax States Better to Live In?
• The Nine States With No Income Tax
• 2026 State Tax Changes to Know Now