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3 Reasons You May Have to File Tax Returns in Multiple States

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Time is running out on tax season for 2014, and according to the Wall Street Journal, the Internal Revenue Service will receive 30 million returns -- or about 20 percent of the total filed -- in the last week before the April 15 deadline.

The last thing many taxpayers want to hear at this point is that they'll have to fill out more than the two returns for Uncle Sam and the state they live in. But there are some fairly typical situations in which you'll have to file in multiple states.

You Moved Mid-Year

If you moved between two states that impose a state income tax during 2013, then you'll almost certainly have to file tax returns for both. The only exception is if you moved early enough or late enough in the year that your income in one state falls below the filing limit -- and even in that situation, some states will make you file if your total income for the year falls above a certain amount.

Usually, you'll have to file as part-year residents in both states. Each return will reflect the income that you earned in that state while you lived there. As a result, most of the time, your income won't be double-taxed, even if the states involved don't allow tax credits against each other's tax liability. But if you continued to earn income from sources within a state even after you stopped living there, you might have to prepare a nonresident return for a separate time or incorporate part-year resident and nonresident status on the same state income tax return, if it's allowed.

You Live in One State but Work in Another

Some people live in one state but work in another. In those cases, unless the states have a reciprocal tax agreement, you'll typically have to file two tax returns: a nonresident return for the state in which you work and a resident return in the state where you live.

Again, many states offer tax credits for state taxes incurred in another state. Typically, it makes sense to complete the tax return for the state in which you work first, as states that offer credits for taxes paid elsewhere typically yield to whichever state was the source of the income.

Once you know how much tax you'll pay as a nonresident worker in the one state, you can often claim all or part of that tax paid as a credit against your tax in the state in which you live on your resident return.

You Have Investments In Other States

If you own stocks, bonds or mutual funds, you usually have to pay tax only in the state where you live, regardless of where a particular company or fund does business. In rare circumstances with more complex investments, you might have to file a state tax return in another state based solely on investment income.

For instance, with master limited partnerships, you're considered to earn taxable income in any state where the partnership operates and generates income. Typically, a given partnership has operations in so many different states that the amount of income allocable to any one state is small enough to avoid having to file. Moreover, many partnerships operate in areas where no state taxes are owed. But if you do have a large enough position, you could be required to file tax returns if a given state's allocable income is big enough.

Be Ready

Because of the way the IRS shares information with various states, you shouldn't assume that another state won't find out about income you earned there. The safe thing to do is to look at the tax laws governing multiple state returns and make sure that you either file or qualify for an exemption to filing requirements. Otherwise, a state audit could make your life uncomfortable.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.


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