Does anyone know how it works if you live on one side of the border of a state and work in the other?

Typically the income is taxed in the state it’s earned and also in your resident state, but your resident state usually gives a credit to you for the taxes paid in the nonresident state.

Your employer will withhold taxes for the state you are working in. At the end of the year, when you file taxes, you will file your state taxes for where you live and state taxes for the state that had taxes withheld from your pay check. Essentially, you should get a return from the state you were not living in and then have to pay the state you are living in. A lot of it just depends on the two states involved.

A lot of people here work in Memphis and live in MS, and so from what I understand they pay income tax in MS. TN doesn’t have an income tax, just tax on dividends and interest. Anyway, the taxes are filed according to where you live. Not sure if it is different in other states? I am pretty sure when I worked in VA and lived in MD, I payed MD tax. Again, taxed where I lived.

This situation applies to some people that work at Ft. Campbell Army Base. Half of the base is in Kentucky, half of the base is in Tennessee. They pay taxes according to where their job is located within the base. Same applies to the location of their house.

Is that right, @Adirondackwannabe? When I lived and worked in Massachusetts, we had a couple of people who lived in New Hampshire for the lower taxes and commuted from there. I never heard that they were paying Mass. taxes. But then, I didn’t inquire very closely.

Some states have reciprocity agreements, which can vary greatly by which states they are. Best course of action is to talk to a local tax preparer the first time to make sure it is set up correctly.

There is no one answer. Each state is different. Some states tax its residents, some tax those who work in its borders, some tax both, some tax neither. Some give a credit for another state’s taxes paid, some don’t. You need to research your specific states’ to see what you’ll have to file, and what credits you may be able to claim.

California is trying to pass a law that will require residents to pay taxes on all their income, regardless of which state it was earned in, plus make residents of other states pay taxes on all income earned in California. I don’t know how far they have gotten with this plan.

California has currently made enemies of internet companies by requiring them to collect and pay sales tax on all merchandise sold to residents of California.

It’s different for different situations. It’s very, very common in the area I live in (the states around here are quite small), to live and work in separate states. Larger employers typically will withhold taxes for the state you live in, while smaller employers withhold taxes for the state you work in. In the latter situation, you have to file two state income tax returns. The state you work in refunds you the money that’s been withheld, and you have to pay taxes to the state you live in. If you’re lucky, you work in the higher taxed area, and actually come out ahead at the end.

@Jeruba It varies from state to state how they treat income generated outside their borders. Most states tax any income generated within their borders. A few states don’t have any income tax.

@YARNLADY, I don’t think it’s going to have a significant effect until California can tax the income of residents of other countries who are employed by Califiornia companies.

@Jeruba Oh, don’t give them any ideas.

@YARNLADY, ??? I would like to see all those technical writers and engineers in Bangalore who are working for Silicon Valley companies pay their share. My former local colleagues who are out of work because their jobs have been outsourced to India and the Philippines and elsewhere are increasingly dependent on services that fewer and fewer stateside workers are around to pay for.

@Jeruba Interesting point that had never occurred to me. I don’t know what I think about it, but now I am going to ponder the possibility of a tax on people who live outside the US, who basically work for the US by way of call centers and alike. But, wouldn’t a federal tax make more sense than state?

@Jeruba That logic makes a lot of sense. I didn’t think of that.

Really? I started thinking about it some five or six years ago when I began losing co-workers to layoffs while “outsourcing” was the word on all sides. My colleagues’ jobs literally went to India, where untrained writers worked for 1/5 the pay but it took far more than 5x the effort to accomplish an inferior result (and I tried and utterly failed to get any managers to look at the actual cost per finished page rather than the hourly rate).

I began wondering what would happen as more and more laid-off employees here in Silicon Valley and elsewhere found themselves drawing unemployment, requiring public services, etc., which are paid for out of tax moneys that fewer and fewer of us were paying into. The money to fund those projects was going offshore. It was good for the employers’ bottom line but bad for everyone else. It never occurred to me that people around me weren’t seeing this.

Now those same employers talk about job creation and the prospect of unjust tax burdens. Pah.

(And of course those same laid-off workers aren’t putting many dollars into the local economy, which hurts local consumer-oriented businesses but not the corporations that laid them off. The same people are consistently the winners in this picture, and the same other people are consistently the losers.)

When this happens across state lines, there are some systems in place that tend to right the balance. Across international lines, not so much.

@Jeruba I have thought of it in terms of trade balance, some sort of tariff on imported goods. Especially countries that tax us heavily to bring goods into their country. What you suggest is taxing the actualy employee an individual tax, the out of country employee. Or, is your proposal to require the company to pay a tax on each of the employees they hire out of country who directly gives services to the US?

@JLeslie, I don’t have anything as concrete or well-thought-out as a proposal to offer, I’m afraid. I just think there ought to be some way to recapture revenues that aid home-grown laid-off workers from the overseas workers who’ve taken their jobs and the stateside companies who benefit from their cheap services (and don’t, by the way, use their gains to employ more U.S. workers).

Well in fairness I would think a state should be able to collect taxes where you live since a person will recieve most of the benefits from that state if something should happen to them. As for businesses; I would think they collect taxes from that business. Not to mention that employees pump some of their cash into the local economy by buying local lunches and sometimes shopping near by because of time issues.
@JLeslie I agree that American Companies that go abroad to have to pay heavier taxes. I’m sure plenty of them get tax breaks that I think should only apply to companies that stay and try their best to boost our own economy and not just the pockets of their executives..