The U.S. tax code is a labyrinth of complexity, a fact that 88 percent of respondents in a recent poll by TaxEDU and Public Policy Polling agreed upon. However, the complexity that most people are aware of is just the tip of the iceberg. One of the least understood and complied with aspects of the tax code are nonresident income tax filing laws.
Nearly half of the states in the U.S. technically require individuals to file nonresident individual income tax returns if they work for even a single day within that state. This is a fact that very few Americans are aware of, and even fewer would go to the effort of filing income tax returns in every single state in which they work for a day or answer some emails while on vacation.
The strictest nonresident filing obligations are found in Arkansas, Delaware, Kansas, Michigan, and Nebraska, where nonresidents are required to file a return if they earn any income in the state. Other states, like Colorado, Maryland, New Mexico, North Dakota, and Rhode Island, require nonresidents to file if they earn any income in the state and earn enough total income to be required to file a federal return.
In contrast, states shown in blue on the map have established statutory nonresident income tax filing thresholds designed to prevent nonresidents from having to file and pay income taxes when they conduct only minimal work in the state. These thresholds are a prudent way for states to reduce tax compliance burdens for those who spend only a minimal amount of time working in a state.
However, the overly stringent nonresident income tax filing laws that remain on the books today are the product of a bygone era, when most people worked from one location, and work travel was less widespread. Today, these outdated state laws fit uncomfortably within a modern economy, as evidenced by utterly low levels of both compliance and enforcement.
Moving forward, one relatively easy but meaningful step policymakers can take to make future tax seasons less burdensome is to modernize their state’s nonresident income tax filing, withholding, and reciprocity laws. More states should consider adopting reciprocity agreements—especially with their neighboring states—whereby states mutually agree that taxpayers who live in one state but work in the other are obligated to file only in their state of residence.
In conclusion, tax laws should be enforceable—and generally enforced. Lack of compliance and enforcement are often symptoms of a deeper problem with the nature of the policy itself. It’s time for a change, and that change should start with a thorough review and modernization of nonresident income tax filing laws.