Out-Of-State Income: Do I Have To Pay Income Tax in my State?

By Christopher Coble, Esq. on May 28, 2015 | Last updated on March 21, 2019

Most people have one job and earn income in the state where they live. So they pay taxes in one state. That's simple. But, for people who earn income in states other than where they live, things get a bit more complicated.

Recently, the United States Supreme Court ruled that Maryland's tax on out-of-state income is unconstitutional.

Comptroller v. Wynne

In the case of Comptroller v Wynne, Maryland residents Brian and Karen Wynne sued after they were denied income tax credits for income they earned out-of-state.

Usually, you pay income tax to the state where you earned the income. So, if you have a business in Nevada, but you live in California, you would pay income tax to Nevada. Most states offer tax credits to people who already paid income tax to another state, so they would not be taxed twice.

In Maryland, the state only offers credits for state income tax on income earned out-of-state. Counties in Maryland still apply a local county tax on out-of-state income. There are no credits for county tax.

Supreme Court's Ruling

In its opinion, the Supreme Court stated that the dormant Commerce Clause "precludes States from 'discriminat[ing] between transactions on the basis of some interstate element,'" and a State "may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State."

In prior cases, the Court has invalidated state tax schemes that twice tax out-of-state income because the scheme discriminated against interstate commerce. Similarly, Maryland's tax scheme is a violation of dormant Commerce Clause of the United States Constitution.

What Now?

After the Supreme Court's ruling, Maryland will now have to pay tax refunds to people who were taxed twice due to county tax. Maryland officials believe that up to $200 million in refunds will be paid.

Other States and Cities Affected

This ruling could also impact tax schemes in other states and cities. New York's telecommuter tax imposes income tax in their home state and the state where the employer is located. Philadelphia, St. Louis, and Kansas City also charge a city tax on top of the tax workers already paid to the state where they earned their income.

All these tax programs may soon be invalidated as well pursuant to the Supreme Court's ruling. If you believe that you are being double taxed on your income, consult with an experienced tax attorney for help.

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