Filing Status

My wife and I earn income in separate states. Can we still file jointly and if so, do we have to pay state taxes on both of our incomes in both states?

Great question!

You can file your federal return MFJ, and for the states.

You may have a lower tax bill if you file separately for the state income taxes, Or maybe not.

Read the rules for each state form and then try it both ways, MFJ and Married filing separately.

Usually the state holding the tax deductions will have priority.
The state not holding the tax deductions will give you credit for paying taxes in the "other state". You attach a copy of the"other state's" tax form to your state tax form to prove you paid the taxes there.

Is that clear?

Probably the first question you must settle is the state of residency for you and your wife (which may or may not be the same state, depending on your primary work location and/or other indicators of residency such as driver's license, voter registration, auto registration, etc.).

Most states will tax your "worldwide income," as does the federal government for citizens and U.S. residents. That means most states consider their residents liable for taxes not only on income made in that state, but anywhere else in the world.

Most states also consider any income earned within a specific state to be subject to tax by that state, no matter where the residence of the person earning the income. Some states do have thresholds, below which income earned by a non-resident is not subject to state tax -- you must check the rules for the state(s) where you work as a non-resident.

Most states will allow a resident taxpayer a credit for any taxes paid to another state on a non-resident tax return -- and most states require residents claiming the credit for taxes paid to another state to include a copy of the non-resident return filed with the other state. A few states require a copy of the W-2 showing withholding for the other state(s) or a copy of the check(s) if other state taxes were paid that way.

So, the checklist is:
1. Determine your state of residence.
2. Check the requirements for filing of returns by non-residents in any other state(s) where you worked in 2002, and file the required non-resident return(s).
3. Prepare your federal and resident state returns and, if permitted by your state of residence, claim the appropriate tax credit for the taxes already paid to any other state(s).

regards,