Nonresidents who earn income from sources within a particular U.S. state are generally required to file a state nonresident income tax return. Whether you’re a remote worker, a business owner, or a freelancer operating across state lines, understanding how to file a nonresident return—such as New York’s IT-203 or California’s 540NR—is crucial for remaining compliant and avoiding double taxation.
What Is a State Nonresident Tax Return?
A state nonresident income tax return allows individuals who are not legal residents of a state to report income earned within that state. It ensures that taxes are paid only on the in-state sourced income. Typically, wages, business income, rental income, and capital gains from property located within the state must be reported.
Filing a nonresident return is often required even if you live in a no-income-tax state like Florida or Texas but earn money in a state that does tax income, such as California or New York.
New York Form IT-203: Nonresident and Part-Year Resident Return
Who must file: Individuals who are not full-year residents of New York but earned income from New York sources during the tax year.
Common Income Sources That Require IT-203 Filing:
- Wages from a New York employer
- Rental income from New York property
- Business income earned in NY
- Capital gains from selling NY-based property
Key Sections of IT-203:
- Federal Amount Column: Enter income from your federal return (1040).
- New York Source Column: Enter only income sourced to NY.
- Allocation of Adjustments: Deductions and exemptions must also be prorated to match NY-sourced income.
IT-203 also allows credits and deductions for taxes paid to other jurisdictions to prevent double taxation.
California Form 540NR: California Nonresident or Part-Year Resident Income Tax Return
Who must file: Nonresidents and part-year residents who earned income from California sources.
Income Sources That Trigger 540NR Filing:
- W-2 income from a California employer
- Freelance or consulting income for California clients
- Rental income from California property
- Sale of real estate in California
Key Components of Form 540NR:
- Schedule CA (540NR): Used to adjust income between federal and California rules.
- Column A (Federal income): Pulls data from your IRS 1040.
- Column E (CA-source income): Only income sourced from California.
- Taxable Income: Calculated based on prorated income and credits.
California uses a two-step method: it calculates tax on total income and then multiplies it by a ratio of CA-source income to total income. This ensures fair taxation on only CA-sourced earnings.
How Nonresident Tax Returns Work with Your Home State
Most states allow a credit for taxes paid to another state, which prevents you from being taxed twice on the same income. For example, if you live in Pennsylvania and earned freelance income from clients in California, you may:
- File Form 540NR in California
- Pay tax on California-sourced income
- Claim a credit on your PA return for taxes paid to California
Filing Requirements by State
Each state sets its own threshold for requiring a nonresident return. In general, if your in-state income exceeds the personal exemption or standard deduction for that state, you must file. However, some states have lower thresholds or specific rules for remote workers and telecommuters.
Common Deductions and Credits for Nonresidents
- State tax paid to other states credit
- Rental property depreciation and expenses
- Prorated standard or itemized deductions
- Earned income credit (if allowed by the state)
Tips for Filing Nonresident Returns
- Maintain detailed records of income earned in each state
- Use tax software with multi-state filing capabilities
- File early to ensure smooth processing and faster refunds
- Don’t forget to allocate deductions and withholdings between states
- Consult a tax professional if your income sources span multiple states
States Without Income Tax
States like Florida, Texas, Washington, Nevada, South Dakota, Alaska, and Wyoming do not levy income tax. If you’re a resident of one of these states but earn income from a state that does collect income tax, you still may need to file a nonresident return in that other state.
Conclusion
Filing a state nonresident income tax return is essential when you earn income from a state where you don’t live. Forms like IT-203 in New York and 540NR in California are designed to ensure that only income earned within those states is taxed. Understanding how to allocate income, deductions, and credits will not only keep you compliant but also help you avoid overpaying. Accurate nonresident filing is a critical step in optimizing your overall tax position and ensuring proper coordination between state and federal tax obligations.
