Multistate returns are filed by the person who either lives in more than one state or works in more than one state. The state wants a part of the incomes of the person working in multistate. However, there are certain restrictions to the multistate taxation that you should know before filing returns.

There are two aspects of tax filing that you should understand. One is the resident filing of tax, and another is work state ie, nonresident filing. This concept is essential to understand the concept of the multistate tax system. 

If your Work is out of State in Which You Live

In this case, you have a separate state for working and living. Many citizens commute to another state for work. In such a case, you file two returns. One is resident returns, and another is nonresident return for the state in which you work. 

There are chances of double taxation in case of multi-state filing of returns since you will give away tax for the income which is earned in another state. While the wages you earned in the work state is taxed in the work state itself, in such cases, the tax credit is given by the work state which can be used by the assessee in the resident state to avoid double taxation. 

Contract Basis of Reciprocity

Some of the neighboring states in the country have this agreement and contract which ensure the citizens of the states to work in the neighboring state for a better lifestyle. These contracts are more prevalent among the states where it is normal for the residents to work in the neighboring states for better wages. The assessee to sign an exemption contract with the employer, which enables him to work in the state tax-free. 

The exemption was introduced by the state laws to reduce the burden of taxation and filing on the assessee and to simplify the tax laws overall. In 2018, there are at least 16 States that are using Reciprocity Agreements for taxation jurisdiction. 

The Employer is Out of State

This is a common myth among the taxpayers that they have to be liable for working with an employer who is based in another state. The state laws make it very clear that the income which is earned outside the state is to be regarded in multistate taxation law. For example, if you work and live in the same state, but your employer is based in another country, that does not mean you should be liable for the multistate taxation. You will file the resident state tax returns as usual. The burden of multistate tax filing comes upon the employer who is operating out of state.

The multistate tax filing is relatively simple if you learn and understand a few basic rules. You need to understand the difference between resident and non-resident tax filing. Also, check with the laws whether there exists a Reciprocity agreement between state. If yes, then the income earned in the agreed state is tax-free. Also, make sure that you use the credit given by the nonresident state for the tax paid in the resident state.