Income taxation can be complex, especially for businesses and individuals who live and work in different states. It is subject to multiple regulations of the federal government and states, which may differ in terms of rates and exemptions.
Staying informed of the tax laws is necessary to avoid penalties and ensure compliance.
If you just got a new job in another state, you might wonder whether income tax is based on where you live or work. This article will discuss all the information you need based on income tax, so read on!
What Are the Taxes in the US Based on Income?
Similar to other jurisdictions, taxes in the United States are based on income and vary based on earning capacity. For instance, the United States has a progressive income tax system, where higher-income individuals are subject to higher tax rates. The amount collected is bracketed according to status, whether you are single, married, filing jointly, etc.
State income taxes are imposed by the individual state(s) where a taxpayer lives and earns income, while the federal government levies federal income taxes. Taxpayers need to file state tax and federal tax returns separately. Similar to federal income tax, state income tax can be progressive. However, some states may have a flat rate or no income tax.
Here are the federal income tax rates and brackets:
Note: The following tax rates may decrease or increase based on changes in tax legislation and government regulations.
2023 Federal Income Tax Rates and Brackets
| Tax Rate | Single | Married Filing Separately | Head Of Household | Married Filing Jointly or Qualifying Surviving Spouse |
| 10% | $0 – $11,000 | $0 – $11,000 | $0 – $15,700 | $0 – $22,000 |
| 12% | $11,001 – $44,725 | $11,001 – $44,725 | $15,701 – $59,850 | $22,001 – $89,450 |
| 22% | $44,726 – $95,375 | $44,726 – $95,375 | $59,851 – $95,350 | $89,451 – $190,750 |
| 24% | $95,376 – $182,100 | $95,376 – $182,100 | $95,351 – $182,100 | $190,751 – $364,200 |
| 32% | $182,101 – $231,250 | $182,101- $231,250 | $182,101 – $231,250 | $364,201 – $462,500 |
| 35% | $231,251 – $578,125 | $231,251 – $346,875 | $231,251 – $578,100 | $462,501 – $693,750 |
| 37% | $578,126 and up | $346,876 and up | $578,101 and up | $693,751 and up |
Check out this Forbes article for more information about the United States income taxes.
Is Income Tax Based on Where You Live or Work?
Whether income tax is based on where you live, work, or both depends on those states’ tax regulations. Generally, you must pay resident income tax in the state where you live and non-resident income tax in the state where you work. If one of the states has no income tax, you only need to pay one tax.
Paying income taxes when you live and work across states depends on multiple state laws. In most cases, you must pay income tax in the state where you are a tax resident. However, if the state where you work but do not live has tax laws for non-resident workers, you may also have to pay taxes there. This is known as double taxation.
Discover the legal issues often experienced by remote workers.
What Is Double Taxation?
Double taxation occurs when two taxes are imposed on the same source of income. If you live in one state and work in another, you have to pay two taxes unless one of the states doesn’t impose a resident income tax. Tax credits and exemptions in some states can help prevent double taxation.
Individual shareholders and the corporation are treated separately for taxation purposes. When a corporation declares dividends, they are distributed to the shareholders. Both the corporation’s earnings and the dividends are subject to taxation. This is when double taxation happens.
Since paying income taxes where you live and work is a financial burden, states provide “Credit for Taxes Paid to Another State.” In Virginia, if you pay income taxes to another state and have to pay income tax in Virginia as a resident, you are eligible for a tax credit.
States may also uphold a reciprocity agreement or an agreement not to impose nonresident taxes.
What Is a Reciprocity Agreement?
A reciprocity agreement is an arrangement between or among states that prevents or reduces the burden of double taxation. Residents must pay taxes to their home state and are exempt from paying taxes by the state where they work or earn income.
Tax reciprocity agreements apply to remote workers. However, income tax payment may still be required for workers whose employers are based in states with telecommuting laws that tax nonresident remote workers.
For example, if you live in Florida and work remotely for a company based in New York, you won’t have to pay income tax in Florida.
However, New York has a convenience rule that allows the state to tax nonresidents who work remotely for a New York-based company, regardless of where the employee lives.
Income taxes are imposed based on where you live, work, or both. Multiple regulations must be considered when working remotely and living and working in different states.
Tax reciprocity agreements do not always have equal terms, so individuals need to understand the terms and conditions of the agreement between their home state and the state where they work.
You can check states with reciprocal agreements on Thomson Reuters to learn more.
Are US Citizens Taxed on Their Worldwide Income?
Yes, US Citizens are taxed on their worldwide income. U.S. citizens and resident aliens’ worldwide income from all sources are subject to tax following the Internal Revenue Code. If you pay income tax in a foreign country, you must still file a U.S. income tax return while working and living abroad.
Taxing income from all sources worldwide may result in double taxation. However, U.S. citizens living abroad may qualify for foreign-earned income exclusion and foreign tax credit after filing a U.S. return.
The U.S. has tax treaties with many countries to prevent double taxation and provide relief to taxpayers. Treaties are generally reciprocal, and qualified persons may enjoy tax credits, tax exemption, and reduced tax rates.
Taxation: Keep Yourself Informed
Income taxes can be based on where you live or work. In the United States, taxes are subject to multiple tax laws, and the amount you owe depends on various factors. These factors include your residency status, source of income, and specific tax regulations in each state.
There can be instances when income taxes are levied not just on where you live or work but also on both. A Supreme Court decision disfavored multiple taxation. Thus, tax treaties, credits, and exemptions are applied to ensure fairness in the income tax system.
