Are state tax withholdings based on where you live or work?

Question

My husband works for an oilfield company here in New Mexico. Yet, one of the company's rig's, that he works on, is located in Colorado. I was looking over his newest paycheck stub and noticed that state taxes are being withheld from both states! Is this right? I thought that state tax withholding is based on where you live. Am I wrong?

Answer 1

Great question. If one is a resident of one state, let's say New Mexico, then New Mexico will tax that person on ALL income earned REGARDLESS where it was earned. If one works in a state where they are NOT a resident (they call it a non-resident), let's say Colorado, then Colorado will tax them on only income earned in Colorado.

So, yes, income earned in Colorado will end up on both Colorado and New Mexico income tax return. Sucks, huh? Not to worry, most states (New Mexico included) have a provision to take the sting out of it (form PIT-ADJ). They allow you a credit for taxes paid to the other state. In general, if you have earned income that is taxable in both your resident state and another state, your resident state will decrease their tax by whichever is lower:

1) the tax paid to the other state

2) the tax owed in your home state on that income.

For example, if he earned $10,000 while in Colorado as a non-resident and the CO tax rate is 6.5%, CO will want $650. If New Mexico's tax rate is 5.5%, they will want $550 on that same income. Step 1, do a Non-Resident tax return for Colorado and make sure they get their $650 (most will have already been paid through withholding), Step 2, do a New Mexico Resident tax return and fill out the PIT-ADJ (line 21) to get a credit of $550. If Colorado's tax rate is only 3%, you will owe CO $300 and your NM credit will now be only $300. The credit is whichever is less, the Colorado tax or the New Mexico tax on the same amount on income. Get it?

Now, as far as withholdings, his employer should only be withholding NM taxes when he is in NM and CO taxes when he is in CO. If they withhold NM and CO taxes when he is in CO, then he will probably get a nice refund when he does his NM taxes.

Hope this helps :)

By the way, ignore comments about not owing anything to Colorado. Colorado taxes all income earned in that state. You can't escape it legally.

Answer 2

Almost all states impose income tax on income earned in that state including non-residents.

Since Colorado and NM don't have a reciprocity agreement you will have to file a Colorado non-resident return and on your NM return you should be able to take a credit for taxes paid to other states. Here is a website that explains state tax withholding.

http://www.payroll-taxes.com/articles/reciprocals.html

Answer 3

Taxes are withheld based upon the tax rate in the state in which you are employed, however taxes are paid to (and at the tax rate of) the state in which you legally reside. For example: If I live in Vermont but work in New Hampshire, my employer will withhold taxes at the New Hampshire rate (and NH has no personal income tax), but I am required to pay taxes on my income at the Vermont rate since that is where I reside. This situation wouldn't be a great one because not enough tax would be withheld and I would be left with a hefty tax bill!

You have the option of filing in both states and requesting a refund on taxes paid in the state with the lower total earned income, but it makes your taxes very complicated.

Answer 4

Actually, state tax withholding is based upon state law. Since we have 50 states, we have 50 laws governing it. Not surprisingly, each state does it differently. In your case, Colorado requires withholding on work performed in that state. If your husband hasn't established residency (each state has different laws regarding how long you stay before you are considered a resident), then you will merely file a Colorado Non-resident tax return stating that $0 in income and get it all back. Each state has forms that you can file with your personnel department that will allow only the state of residency to withhold. Contact his payroll manager for more information.

Answer 5

State where the work is done wants tax dollars; surprise, surprise!!!! Don't worry about it. All you do when you file your 2006 return is file a Colorado Non-Resident return paying taxes on those dollars earned in Colorado. You take the Colorado tax off on your New Mexico state tax return as they won't tax you on money earned in another state.

Answer 6

He should pay taxes in NM where you leave, but if he works in Colorado, he should pay taxes there too because the money is earned there.

Answer 7

a tax (also known as a "duty") is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e.g. tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a subnational entity.

Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. In modern, capitalist taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents.

Taxes are usually collected by a governmental agency such as the Internal Revenue Service in the United States or HM Revenue and Customs (HMRC) in the UK. When taxes are not paid to a government's satisfaction, civil penalties such as fines or forfeiture are carried out against the non-paying entity or individual. These penalties could also have criminal penalties such as imprisonment enforced by governmental investigators, such as the Federal Bureau of Investigation and the Department of Justice in the US. In most modern industrialized countries, when an individual fails to pay his government the taxes, it will ultimately result in the loss of money and not imprisonment (unless fraud was a serious factor).

The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious.

Public finance is the field of political science / economics that deals with taxation.

Answer 8

Basically, yes its held out of both, you can apply to get that money back from Colorado though since you aren't a resident there.

Answer 9

It is based on state law.

Answer 10

Where u live.