A disturbing feature of American taxes is the way some states tax the income of its residents earned both within and outside the state, as well as income earned within the state by nonresidents. Carly Fiorina, former Hewlett-Packard CEO and now presidential candidate, filed 17 state income tax returns last year. Many Americans file multiple state income tax returns in states where they do not live or work, but where they own a business or have income-producing activities. Ordinarily, the home state will allow residents a credit on income taxes paid to other states.
Often horse owners, ranchers and farmers incur income in various states. For example, a racehorse that wins purses in California and in New York will realize income for the owners who reside in other states. A show horse being trained and then sold in another state will incur income for the nonresident owner. Income earned in multiple states by horse winnings can create a huge pile of state tax returns, even though you will usually get credit.
The way it works is that your home state taxes you on all your income; states where you don’t live might tax you on the income you earned in those states. The home state usually will credit you back for income tax paid on income earned in other states, but not always.
The U.S. Supreme Court recently decided a case involving this feature of Maryland state taxes. [Comptroller of the Treasury of Maryland v. Wynne.] The case considered Maryland’s policy to not offer its residents credit against the income taxes they pay to other states. This resulted in double taxation of income earned by Maryland residents outside the state. The Supreme Court considered the issue of multiple taxation by denying residents a credit on income taxes paid to other states. It held that Maryland’s tax scheme violates the Commerce Clause.
Some states have bilateral agreements with other states. For example Virginia residents who earn income in Maryland pay tax only to Virginia, and vice versa. States that have no income tax are: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.