Pay more taxes if you live work in different states?

Question

My fiance and I live in Nebraska, he works in Iowa. I have heard that he has to pay taxes in both states. Is this true? If so, will the credit issued for payment to one state equal the additional taxes paid to the other state? Will he wind up paying more combined taxes, than if we just lived in the same state he works in? We are not yet homeowners, but when we do buy, will the deduction for our mortgage interest in Nebraska be credited toward the taxes owed in Iowa?

Answer 1

That depends. Some states have reciprocity agreements where residents who work across state lines only pay taxes in their home state.

IA and NE do not appear to have a reciprocity agreement in place. In this case, your fiance needs to file an Iowa non-resident return listing only the income earned in IA and pay any tax due. Then he'll file a NE resident return listing all income earned from all sources and take a credit against his NE tax liability for the IA taxes paid. The net effect is that he'll pay taxes at the higher of the two states' rates.

Once you get married the process will be essentially the same. IA state law will determine how he files -- jointly or separately -- but the mechanics will be the same. You generally don't claim any deductions for mortgage interest paid as a non-resident but again IA state law would determine that. At any rate it would really be a wash as it would reduce the credit allowed by NE anyway.

Answer 2

It depends on any reciprocity agreement between Iowa and Nebraska. Its possible that the agreement (if any) says that you only have to pay taxes to one state or the other.

I live in Massachusetts close to the Rhode Island and Connecticut borders and I have clients from all 3 states with different working states.

Here, you pay taxes to the state you work in and the state you live in. You get a credit equal to the lessor of the taxes charged in your home state or the taxes charged on your non resident income. The effect is that you are not taxed twice on the same income.

Answer 3

You really need to talk to a tax professional who knows about the specifics of those two States. In some States, you would only owe tax in the State where he actually earned the income.

Answer 4

No, that's not true. I lived in Washington, D.C. for a number of years and worked in Maryland and Virginia. You only have to pay taxes to both states if you moved between one state to the next one. The only thing he has to do at his job in Iowa is to make sure he has a W-2 form for Nebraska and make sure his employer is taking out taxes for the federal government and Nebraska.