State Individual Income Taxes on Nonresidents: Managing Inconsistent State Guidelines

State regimes for taxing nonresidents are complex. Complying with inconsistencies among states is a complicated process for individual taxpayers and SALT advisers. Some states utilize filing and withholding thresholds that provide some relief for qualified taxpayers. However, many states require nonresident filing and withholding on any state-sourced income. Even when states offer relief, taxpayers should not assume every taxpayer qualifies for such relief. For example, mutuality requirement states offer relief only to nonresidents who live in states with a “substantially similar exclusion” or no individual income tax, for example. Additionally, some states have clawback provisions that negate the relief for certain classes of employees. Arizona, for instance, revokes the relief for professional athletes and entertainers, while Utah revokes relief for “key employees.” 

Often, neighboring states adopt reciprocity agreements. These agreements alleviate the taxpayer's burden of filing a nonresident return when they reside in one state but work in another. Assuming a multistate taxpayer qualifies for withholding relief in multiple states without examining the nuances of each state would be an oversight. Considering the complexities and inconsistencies of state guidelines, it is not surprising that nonresident income tax compliance is so low.

Listen as our panel of state and local tax veterans compares and contrasts the state rules for taxing nonresidents in specific states and offers compliance advice for SALT practitioners and multistate taxpayers.