Does a K-1 Really Affect State Taxes? – Avoid this Mistake + FAQs
- March 29, 2025
- 7 min read
Yes – a Schedule K-1 does affect your state taxes if your state taxes personal income.
Income reported on a K-1 flows through to your state tax return, potentially increasing your state taxable income (and even triggering filings in other states) depending on the K-1 type and state tax laws.
A Schedule K-1 isn’t just a federal form; it can change what you owe to your state (or multiple states).
In this comprehensive guide, we’ll explore how K-1 income is taxed federally and in all 50 states, and what it means for partnerships, S corporations, and trusts. By the end, you’ll understand the state tax implications of a K-1 inside and out.
In this article, you will learn:
🗽 How Schedule K-1 income is taxed at the federal level vs. the state level – for partnerships, S-corporations, and trusts.
🌎 A state-by-state breakdown of K-1 taxation – see how all 50 states handle income from K-1 forms (with a comprehensive table).
⚖️ Key concepts like pass-through taxation, residency vs. source-state income, and tax credits that prevent double taxation on K-1 income.
🚩 Common pitfalls and mistakes to avoid with K-1 state taxes – including multi-state filing traps and missed tax credits – and how to avoid them.
💡 Expert insights and FAQs – real-world examples, pros and cons of pass-through income, and answers to frequently asked questions about K-1 forms and state taxes.
Let’s dive in and demystify how your K-1 can impact your state tax bill!
What Exactly Is a Schedule K-1 (And Why Should You Care)?
A Schedule K-1 is a tax form that reports your share of income (or losses, deductions, and credits) from certain entities like partnerships, S-corporations, estates, or trusts.
It’s how pass-through entities tell you and the IRS how much of the entity’s income is yours, so you can report it on your personal tax return.
Think of it this way: instead of a regular paycheck (reported on a W-2) or freelance income (1099), a K-1 is the form that tells you your slice of the pie from a business or trust you have a stake in.
The catch is that the tax burden is passed through to you individually, rather than the business or trust paying tax on it. That’s why it’s crucial for both your federal and state taxes.
There are actually three common types of K-1 forms, each corresponding to a different kind of entity:
Partnership K-1 (Form 1065): Your Share of a Partnership’s Pie
If you are a partner in a partnership or a member of a multi-member LLC (treated as a partnership for tax purposes), you’ll receive a Schedule K-1 (Form 1065). This K-1 shows your share of the partnership’s profits, losses, credits, and deductions.
For example, if you own 50% of a partnership, you get 50% of each item on the partnership’s tax return allocated to you on the K-1.
Federal Tax: The partnership itself does not pay federal income tax on its earnings. Instead, each partner reports their share of income from the K-1 on their personal federal tax return (usually on Schedule E or other appropriate schedules).
The IRS (Internal Revenue Service) treats it as if you earned that income directly. Whether the partnership made money (taxable income) or lost money (which could offset your other income), it goes on your 1040 via the K-1.
State Tax: States also typically treat partnerships as pass-through entities. This means you are responsible for taxes on your share of partnership income at the state level. If you live in a state with income tax, you’ll include that K-1 income on your state return.
However, complications arise if the partnership does business in multiple states (more on that soon). Some states might require the partnership to file an information return or even pay a nominal tax or withholding on behalf of partners, but ultimately the income usually “flows through” to you for state taxation as well.
S Corporation K-1 (Form 1120S): Income for Shareholder-Employees
An S Corporation is a special type of corporation that elects to pass its income through to shareholders (similar to a partnership for tax purposes). If you’re a shareholder of an S-corp (often also an employee of it), you receive a Schedule K-1 (Form 1120S) each year. This reports your share of the corporation’s profit, losses, deductions, and credits.
Federal Tax: Like partnerships, S-corps generally pay no federal income tax at the corporate level. Instead, profits (and certain separately stated items like capital gains or dividends) are allocated to shareholders via K-1s. You report that income on your personal federal tax return.
One twist: S-corp owners often also draw salaries (reported on W-2), which are separate from the K-1. The K-1 reflects the business profits after salaries and expenses. On your 1040, you’ll report K-1 income similarly to partnership income (often on Schedule E). It’s taxed at your individual rate.
State Tax: Most states honor the federal S-corp rules and let income flow to shareholders’ personal state returns. That means your K-1 income from an S-corp will generally be included in your state taxable income. However, a few states don’t recognize S-corp status or impose their own taxes on S-corps.
For example, New Hampshire and Tennessee historically taxed S-corps like regular corporations (no personal tax on the K-1, but the corporation itself paid state tax – effectively treating your K-1 income as already taxed at the entity level). New York City also ignores S-corp status (taxing S-corps with a city corporate tax).
And states like California, New Jersey, and Illinois allow pass-through treatment but still charge a small franchise tax or fee on the S-corp’s profits in addition to the shareholders paying personal tax. We’ll cover these variations state-by-state later. The key point: in most states, expect your S-corp K-1 amount to be part of your income subject to state tax, just like partnership income.
Estate/Trust K-1 (Form 1041): Income Distributed to Beneficiaries
If you’re a beneficiary of a trust or estate that generates income, you might receive a Schedule K-1 (Form 1041). Trusts and estates file their own tax returns (Form 1041), and if they distribute income to beneficiaries, that income gets reported on K-1s to each beneficiary.
Federal Tax: Trusts and estates can be a bit different. They do pay federal tax on any income they retain (at often high trust tax rates), but they get a deduction for income distributed to beneficiaries. That distributed income is then taxed to the beneficiaries.
The K-1 tells you what income (interest, dividends, capital gains, etc.) from the trust/estate you need to include on your personal 1040. For instance, if a trust earned $10,000 in interest and paid $10,000 out to you as a beneficiary, the trust itself might owe no tax (deduction for distribution), and you’ll pay tax on that $10k, reported via the K-1.
State Tax: States generally follow a similar pattern. If you receive a trust or estate distribution reported on a K-1, you include that income on your state tax return (if your state has income tax). The trust or estate may also have to pay tax in its state on any income it kept. There’s a web of state rules for trust taxation – some states tax a trust if the trust creator or trustee is in-state, others tax based on beneficiary’s location.
But as a beneficiary, usually you just pay tax on what your K-1 shows you received, in your state of residence. One thing to note: if the trust is in a state different from your own, sometimes both states might claim the income (the trust’s state taxing the trust, and your state taxing you). Fortunately, most states offer credits or other rules to avoid double taxation in such cases. We’ll touch on credits shortly.
Bottom line: A K-1 is your ticket to pass-through income – meaning the income “passes through” the entity to you. Federally, none of these K-1 entities pay tax on income (except trusts on retained income, or special cases); you do.
And for states, typically they take the same approach: they tax you, the individual, on that K-1 income. Now, let’s see exactly how that works for state taxes and why it depends on where you live and where the income is earned.
How K-1 Income is Taxed Federally (The Starting Point)
Before we dissect state taxes, it’s critical to understand the federal foundation because most states build on it. When you receive a K-1, regardless of type, here’s what happens on your federal return:
You report the income on your Form 1040: The K-1 comes with various boxes for different types of income (ordinary business income, rental income, interest, dividends, capital gains, etc.). These amounts get transferred to the appropriate places on your 1040 (often via Schedule E for partnership/S-corp business income, Schedule B for interest/dividends, Schedule D for capital gains, etc.). In short, the IRS treats you as if you earned this income directly.
No double taxation (usually): Unlike a C-corporation which pays corporate tax and whose shareholders pay tax again on dividends, a partnership or S-corp’s income is generally taxed only once – on the owners’ returns via K-1. (There are some exceptions at state level or for certain types of income, but generally pass-through means single level of tax.) For trusts/estates, distributed income is taxed to beneficiaries, not to the trust (avoiding double tax on that distributed portion).
Adjusted Gross Income (AGI) impact: Your federal AGI includes your K-1 income. This is important because most states start their tax calculation from federal AGI or federal taxable income. So, if your K-1 increased your federal AGI by, say, $20,000, that $20k is likely showing up in your state’s starting point for income as well.
Federal deductions and character carry through: K-1 can include not just income but deductions/credits (like your share of charitable contributions the partnership made, or R&D credits, etc.). On your federal return, you use those according to federal rules. Some items (like depreciation, Section 179 expenses, etc.) might have limitations at federal level which are reflected in the K-1. States may or may not honor all those details (some states, for example, don’t allow certain federal deductions or have their own depreciation rules). But generally, the “character” of the income (capital gain vs ordinary, etc.) carries through from federal to state.
In summary, at the federal level your K-1 income is fully integrated into your personal tax return. There’s no separate “K-1 tax” – it just increases your taxable income like any other earnings would (or decreases it if it’s a loss). Now, federal taxes are one thing; let’s see how this income filters into your state taxes.
State Taxes and K-1 Income: It Depends Where You Live (and Earn)
Does every state tax K-1 income? It depends on the state – specifically, whether the state has an income tax and how it treats different types of income. The general rule is: if a state taxes personal income, it will tax all your income (including K-1 allocations), with some credits or adjustments to prevent double taxation. If a state has no personal income tax, then your K-1 won’t be subject to that state’s income tax (because there isn’t one!). However, even if your state doesn’t tax income, you might still owe tax to another state if the K-1 is from an out-of-state business. Let’s break down the scenarios.
Resident vs. Nonresident: Who Gets to Tax Your K-1?
State of Residence: In the U.S., if you’re a resident of a state that levies an income tax, that state typically taxes all your income, no matter where it was earned. This includes wages, interest, and yes, K-1 income from partnerships/S-corps/trusts anywhere in the world. So if you live in, say, New York State and you receive a K-1 from a partnership doing business in Texas, New York will still tax that K-1 income (because you’re a NY resident and they tax your worldwide income). It doesn’t matter that Texas has no income tax; New York will want its share. The upside is that New York would likely give you a credit for any tax you did pay to another state on that same income (more on tax credits shortly).
State as a Source (Nonresident State): In addition to your home state, any state where your K-1 income is sourced might tax you as well, even if you’re not a resident there. For example, if you live in Florida (no income tax) but are a partner in a California LLC, California will tax the income sourced to California that flows to you on the K-1. In this case, you have to file a nonresident California tax return, reporting that partnership income, and pay California tax on it – despite living across the country.
This is because of the concept of source-based taxation: states claim the right to tax income earned within their borders. Partnership and S-corp income is generally considered earned where the business operates (or where the property is, for rental income, etc.). So if your partnership has multistate operations, you might have K-1 income sourced to several states.
Dual Taxation and Credits: Being taxed by two states on the same income sounds unfair – and it is, which is why states have reciprocal credit systems. Typically, your resident state will give you a tax credit for taxes paid to another state on the same income. That way, you don’t pay tax twice on that K-1 money. The credit is usually limited to the amount of home state tax that would otherwise apply to that income.
For instance, say you’re a resident of Georgia (6% tax rate) and you have K-1 income from a partnership in South Carolina (7% tax rate). South Carolina, as the source state, taxes that income at 7%. Georgia, as your home state, would tax that income at 6%, but it will give you a credit for the SC tax you paid. Georgia will allow up to 6% credit (equal to its tax on that income). In this case, SC’s tax was higher, so you pay 7% to SC and Georgia gives full 6% credit – you don’t owe Georgia on that income, but you still ended up paying 1% more (the difference between SC’s 7% and GA’s 6%) that you can’t credit. If it were reversed (home state higher), you’d pay home’s full rate anyway (you’d pay SC, then pay the extra difference to GA). The net effect: you usually pay the higher of the two states’ tax rates on that income, but not double both.
No Income Tax State + Out-of-State K-1: If you live in a state with no income tax and get a K-1 from a state that does have income tax, you’ll owe the nonresident state (since your home state doesn’t tax or credit anything). Example: You live in Texas (no tax) and are a partner in a New York partnership. Only New York will tax your partnership income. There’s no double tax (Texas doesn’t tax at all), but you still have to pay New York and file a NY nonresident return for that K-1 income.
Two States with Income Tax (resident and source): You live in State A and have K-1 income from State B. Both A and B have income taxes. You’ll file in B as a nonresident (pay tax on the income sourced there), then file in A as resident (pay tax on all income, but claim a credit for tax paid to B). You’ll generally end up paying whichever state has the higher effective tax on that slice of income.
Multiple State K-1s: It’s possible to get K-1 income from several states at once (for instance, a partnership that operates in 5 states might give you a breakdown of income by state). In that case, you might have to file 5 nonresident state returns, plus your home state return. This is a common surprise for investors in large partnerships or funds – suddenly you’re getting K-1s and a booklet of “state K-1 supplements” showing you earned $1,000 here, $500 there, in various states. Each state has its own filing thresholds (some might say if your income in that state is below, say, $500 or $1,000, you don’t need to file). But if the amounts are above the limits, you’re technically on the hook to file in each of those states. We’ll cover strategies for multi-state K-1 filings in the Pitfalls section.
States with No Income Tax: Do K-1s Matter at All?
There are currently a handful of U.S. states that do not impose a personal income tax on wages or ordinary income. These are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. (New Hampshire and Tennessee historically taxed only interest and dividends – as of now Tennessee has eliminated its tax, and New Hampshire taxes interest/dividends but not wage or business income.) If you reside in one of these states, any K-1 income you receive is not taxed by your home state, because there’s no mechanism for it.
However, it doesn’t automatically mean you’re off the hook entirely. The key question is: did the entity that gave you the K-1 do business in a state that does have income tax? If yes, that state can tax you as a nonresident on that income.
For example, if you live in Florida and get a K-1 from a partnership operating solely in Florida, then great – Florida has no income tax, and no other state can claim the income (since it was earned in FL and you live in FL). Your K-1 income is effectively tax-free at the state level. 🎉
But if you live in Florida and get a K-1 from a California partnership or S-corp, California will want you to file a nonresident return and pay CA income tax on that K-1 share (California doesn’t care that you live in Florida). So you’d pay CA tax, and since Florida has no tax, there’s no resident credit or anything – you just pay CA and call it a day.
Similarly, Texas residents often invest nationwide. A Texan with a K-1 from a New York LLC will owe New York tax on that income. A Washington (state) resident receiving a K-1 from a business in Oregon (which taxes income) would owe Oregon tax on the share.
The converse is also interesting: if you live in a state with income tax but get a K-1 from a business in a no-tax state (like a Nevada or Wyoming partnership), then only your home state taxes it (since the source state had no tax). This means no double tax and no credits – you just pay your home state as usual. For instance, a California resident with K-1 income from a Nevada LLC will report that income on CA return and pay CA tax on it, even though Nevada didn’t tax it. (There’s no other state tax to credit, so CA taxes fully.)
State Adjustments: Not All K-1 Income Is Equal in Every State
While most states start with federal income, they often have their own tweaks. Some common state-specific treatments that can affect K-1 income:
Different Tax Treatment of Certain Income: A few states tax capital gains or dividends differently (lower rates or exemptions). If your K-1 includes capital gains (say from the sale of a partnership asset), your state might tax that gain at a special rate or give a partial exclusion (for example, Arkansas at one point exempted some capital gains, North Dakota has a lower rate on long-term capital gains, etc.). Usually, you’ll still report the income, but the tax calculation might differ.
Add-backs and Deductions: States often require adding back certain federal deductions. For example, state tax payments aren’t deductible on many state returns, so if your K-1 income was reduced by a deduction for state taxes paid at the entity level, a state might add that back. Or states might not allow bonus depreciation or Section 179 expense in the same way as federal – so if a partnership took heavy depreciation that shows up as a loss on your K-1, some states will make you recompute without bonus depreciation, potentially turning some of that loss into taxable income at the state level. This gets pretty technical, but tax software usually handles it if you input state K-1 info. Just be aware: the income number on your K-1 might not be exactly the income number every state uses; they can adjust it.
Allocations vs. Apportionment: Partnerships and S-corps that operate in multiple states have to allocate or apportion income to each state for tax purposes. States have different formulas for this (often based on the percentage of property, payroll, and sales in the state). As a result, the “state K-1” income might differ from the federal amount for each state. For example, if a partnership earned $100,000 total, and by some formula 25% is apportioned to State A, 75% to State B, your K-1 might effectively be telling State A you earned $25k there and State B $75k, even if federally you just see $100k total. This is why sometimes the sum of income reported on all your state K-1s can differ from the federal K-1 – each state applies its rules. It’s normal and just means you have to report accordingly in each state.
Entity-Level Taxes and Withholding: As mentioned earlier, some states impose an entity-level tax or require withholding for pass-through entities. For example, Illinois charges a 1.5% “replacement tax” on partnership income at the entity level (so partners still get a K-1 but the income was slightly reduced by that tax – there’s no credit to the partners, it’s just a small hit to the partnership). California has a franchise tax on S-corps (1.5% of profits, or a minimum $800). New Jersey and New York have similar nominal taxes or fees. Texas has a franchise “margin” tax that S-corps and partnerships pay to Texas (but no personal tax on the owners). These kinds of entity taxes mean some tax is paid by the business, but usually the full income still flows to you for other states to tax. There’s not typically a credit to you for those, since those taxes are on the business, not on you personally (with one big exception: the new Pass-Through Entity Tax workaround in many states – we’ll discuss that shortly).
Additionally, states like California, New York, Arizona, etc. often require partnerships/S-corps to withhold a portion of income for nonresident owners (like a prepayment of the nonresident’s state tax). If you see a state withholding amount on your K-1 (or a voucher), you should definitely file in that state – not only to pay any remaining tax but also to claim that withholding credit! Otherwise, you might lose that money.
In essence, K-1 income usually will affect your state taxes in any state that taxes income, but how much and in what way can vary. To give you a clearer picture, the next section provides a 50-state overview of K-1 taxation.
50-State Tax Treatment of K-1 Income (Comprehensive Table)
Every state has its own tax code, but we can summarize the basics of how each state treats pass-through (K-1) income for individual taxpayers. Below is a state-by-state guide. For each state, we note whether personal income tax applies and any special notes regarding K-1 income (like unique taxes or non-conformity to federal rules). Remember, “taxes K-1 income” here means the state includes pass-through income in the individual’s taxable income. (All states that have an income tax do, generally.) States with no personal income tax are noted as such.
Key:
“Yes – taxed as ordinary income” means the state will tax K-1 income just like any other income for residents, and tax nonresidents on in-state sourced K-1 income.
“No personal income tax” means the state has no income tax on individuals, so it doesn’t tax K-1 income (though the entity might face some other taxes).
Additional notes highlight special rules (like entity-level taxes or credits).
| State | K-1 Income Taxed? (Personal Level) | Notes on State Treatment of Pass-through Income |
|---|---|---|
| Alabama | Yes – taxed as ordinary income | Conforms to federal pass-through treatment. Residents tax all K-1 income; nonresidents tax Alabama-sourced K-1 income. Allows credit for tax paid to other states. |
| Alaska | No personal income tax | No state income tax. K-1 income not taxed at individual level. (Alaska has no personal income tax at all.) |
| Arizona | Yes – taxed as ordinary income | Arizona taxes K-1 income for residents and Arizona-source income for nonresidents. Arizona allows partnerships to file composite returns for nonresidents. Also offers an optional pass-through entity tax election (SALT cap workaround) at 4.5%. |
| Arkansas | Yes – taxed as ordinary income | Taxes K-1 income as part of individual income. Arkansas offers a 50% exclusion on long-term capital gains (which would include K-1 capital gains). Otherwise standard treatment. |
| California | Yes – taxed as ordinary income | Fully taxes K-1 income for residents; nonresidents pay on CA-source K-1 income. Unique: CA charges 1.5% franchise tax on S-corp profits (LLCs/partnerships pay $800 fee + gross receipts fee). Individuals still pay personal tax on K-1 income. CA requires nonresident withholding on K-1 distributions over $1,500 to out-of-state owners (or composite return). Credits available for taxes paid out-of-state. |
| Colorado | Yes – taxed as ordinary income | Follows federal. Flat 4.4% income tax on all personal income (including K-1). Residents can credit other state taxes. Also has an optional pass-through entity tax election for SALT cap workaround. |
| Connecticut | Yes – taxed as ordinary income | CT taxes personal income including K-1 shares. Notably, CT instituted a mandatory entity-level tax on pass-through entities (PET), with a corresponding credit to the individual to offset personal tax (to help owners bypass the federal SALT deduction cap). So K-1 income is effectively taxed at the entity and credited to individuals, resulting in little or no additional CT personal tax on that income (since the entity paid it). |
| Delaware | Yes – taxed as ordinary income | Taxes K-1 income for residents, and Delaware-source for nonresidents. No special pass-through taxes (aside from the famous corporate franchise tax which is separate and not on pass-through income). |
| Florida | No personal income tax | No state personal income tax. K-1 income not taxed by Florida. (Florida does have a corporate income tax, but it doesn’t apply to S-corps or partnerships, only C-corps.) |
| Georgia | Yes – taxed as ordinary income | Conforms to federal pass-through rules. Taxes residents on all income and nonresidents on GA-source K-1 income. Allows credit for other state taxes. Georgia has an optional pass-through entity tax election (SALT cap workaround) at 5.75%. |
| Hawaii | Yes – taxed as ordinary income | Taxes K-1 income similarly to federal. Hawaii does not allow S-corp income to avoid the General Excise Tax (GET) – but that’s a sales tax. For income tax, it treats partnerships and S-corps as pass-through. Credit for out-of-state tax available. |
| Idaho | Yes – taxed as ordinary income | Taxes K-1 income for residents and Idaho-source for nonresidents. Idaho also imposes a small entity-level tax on certain S-corp income (built-in gains tax) and offers an optional entity-level tax election for SALT cap workaround. |
| Illinois | Yes – taxed as ordinary income | Taxes personal income including K-1. Unique: Illinois has a 1.5% “replacement tax” that partnerships and S-corps pay at entity level. Individual partners/shareholders still pay IL tax on their K-1 income (5% flat in 2025), but this entity tax is like an extra partial tax (no credit to individuals). Illinois does allow a credit for taxes paid to other states. It also now has an optional pass-through entity tax election. |
| Indiana | Yes – taxed as ordinary income | Taxes K-1 income, conforms largely to federal. One nuance: Indiana taxes S-corp shareholders on their share of income and has a corporate-level gross income tax on S-corps for certain items like built-in gains. But in practice for most small S-corps, only the individual tax matters. Credits for taxes to other states apply. |
| Iowa | Yes – taxed as ordinary income | Iowa taxes K-1 income as part of personal income. Iowa allows a credit for tax paid to other states and has no major additional pass-through taxes. (Iowa is phasing in lower flat tax by 2026, but pass-through treatment remains standard.) |
| Kansas | Yes – taxed as ordinary income | Taxes K-1 income, standard pass-through treatment. Kansas has an optional 5.7% pass-through entity tax election available (from 2022) for SALT cap workaround. Otherwise, residents tax all income, nonresidents Kansas-source. |
| Kentucky | Yes – taxed as ordinary income | Kentucky fully taxes K-1 income for residents; Kentucky-source for nonresidents. Kentucky also imposes a limited LLET (Limited Liability Entity Tax) on gross receipts/profits of entities, but it’s usually small and owners get a credit. S-corp and partnership income still hits the personal return as usual. |
| Louisiana | Yes – taxed as ordinary income | Taxes K-1 income for individuals. Louisiana historically required a separate state S-corp election (and taxed S-corps that didn’t elect). Now generally conforms to federal S-corp treatment if an election is made. Louisiana offers a pass-through entity tax election too. Credits for taxes paid to other states are allowed for residents. |
| Maine | Yes – taxed as ordinary income | Maine taxes K-1 income as personal income. Largely follows federal definitions. Maine has some special tax on high-earning S-corps (built-in gains at corp level), but for most it’s straightforward pass-through. Residents can claim credit for other state taxes. |
| Maryland | Yes – taxed as ordinary income | Taxes personal income including K-1. Maryland requires pass-through entities to either withhold tax on nonresident owners or file composite returns for them. There’s also an optional entity tax election for SALT cap workaround. Credits for out-of-state tax available for residents (including credit for DC or local jurisdiction taxes). |
| Massachusetts | Yes – taxed as ordinary income (with exceptions) | MA taxes K-1 income, but with a twist: S-corps in Massachusetts that have gross receipts over a certain amount pay a corporate excise tax (at 2.95% or 1.93% depending on receipts). If the S-corp paid this tax, the shareholders’ share of that income is not taxed on their MA personal return. For smaller S-corps, no entity tax and shareholders pay it normally. Partnership income is taxed normally to partners. Residents credit other state taxes. MA also has an elective pass-through entity tax for SALT cap workaround. |
| Michigan | Yes – taxed as ordinary income | Michigan has a flat 4.25% income tax on individuals (including K-1 income). Note: Michigan does not recognize federal S-corp status for its now-repealed old Single Business Tax; under current law, Michigan treats S-corps as pass-through for income tax (so individuals pay the 4.25%). Michigan also offers an elective pass-through entity tax. Some local city income taxes in MI might tax K-1 income as well if you live in a city with such a tax. |
| Minnesota | Yes – taxed as ordinary income | MN taxes K-1 income for residents and MN-source for others. Minnesota has a new elective PTE tax for SALT cap workaround. No special extra entity taxes on pass-throughs beyond that. Credits allowed for other state taxes. |
| Mississippi | Yes – taxed as ordinary income | MS taxes personal income including K-1 allocations. Conforms to federal pass-through treatment. It provides credit for taxes paid to other states. No unique entity-level pass-through taxes. |
| Missouri | Yes – taxed as ordinary income | MO taxes K-1 income as part of individual income. Missouri typically follows federal definitions and allows resident credit for other state taxes. No special pass-through taxes; however, Missouri’s income tax rate is gradually decreasing under recent law changes (but that doesn’t change how K-1 is taxed, just the rate). |
| Montana | Yes – taxed as ordinary income | Montana taxes K-1 income for residents; source income for nonresidents. Montana requires pass-through entities to withhold on nonresident owners or file a composite return. It also allows an optional pass-through entity tax election for SALT cap workaround. Residents get credit for other state taxes. |
| Nebraska | Yes – taxed as ordinary income | NE taxes K-1 income as personal income. Nebraska requires nonresident withholding by pass-through entities (unless the owner files an agreement). It conforms to federal income definitions and provides credit for out-of-state taxes to residents. Nebraska also has an elective pass-through entity tax. |
| Nevada | No personal income tax | No state income tax. Nevada does not tax individual K-1 income. (Nevada entities may face other business taxes, but nothing on the individual level like income tax.) |
| New Hampshire | No tax on K-1 business income (tax on interest/dividends) | NH has no broad personal income tax on wages or business income. So K-1 income from an active business is not taxed on the individual. However, NH does have a 5% tax on interest and dividends over a certain amount – if your K-1 includes significant interest or dividends, those could be subject to NH’s tax if you’re a resident (though this typically hits investment income, not operating business income). Also, NH levies a Business Profits Tax (BPT) at the entity level on businesses operating in NH (even partnerships/S-corps), so if your K-1 income is from a NH partnership or S-corp, that entity likely paid BPT on its income. In effect, NH treats pass-throughs more like corporations for tax purposes, but as an individual resident, you wouldn’t pay NH personal tax on that K-1 (unless it’s interest/dividend classified). |
| New Jersey | Yes – taxed as ordinary income | NJ taxes K-1 income for residents and NJ-source for others. Unique: New Jersey requires a separate S-corp election at the state level to treat an S-corp as pass-through. If made, NJ mostly treats it like pass-through but charges a minimum tax or fee on S-corps (graduated by gross receipts). NJ also instituted an optional pass-through entity tax (called BAIT – Business Alternative Income Tax) to allow entity payment of tax and a personal credit (SALT workaround). Residents get credit for other state taxes paid. |
| New Mexico | Yes – taxed as ordinary income | NM taxes personal income including K-1 distributions. Follows federal definitions. NM has an elective pass-through entity tax for SALT workaround as well. Standard credit for taxes paid to other states for residents. |
| New York | Yes – taxed as ordinary income | NY State taxes all K-1 income for residents; nonresidents pay on NY-source K-1 income. Nuance: NY fully honors S-corp status at state level, but New York City does not. NYC has a separate Unincorporated Business Tax (UBT) ~4% on partnership income and a General Corporation Tax on S-corps (if not eligible for a lower S-corp tax). However, NYC provides a credit on the NY State return for UBT paid, to mitigate double taxation for city residents. At the state level, NY now has an elective Pass-Through Entity Tax where entities can pay tax and give owners a credit (SALT workaround). Also, NY partnerships must file informational K-1s (IT-204-IP) to partners for NY source income. Credits available for taxes paid to other states. |
| North Carolina | Yes – taxed as ordinary income | NC taxes K-1 income for residents and NC-source for nonresidents. Conforms mostly to federal, with some addbacks (e.g., bonus depreciation differences). NC allows an elective pass-through entity tax. Credits for other state taxes apply. |
| North Dakota | Yes – taxed as ordinary income | ND taxes K-1 income for residents; ND-source for nonresidents. North Dakota has relatively low rates and even a reduced rate on long-term capital gains (40% exclusion) – so if your K-1 has capital gain, part may be excluded for ND residents. ND allows composite returns for nonresidents in some cases and has a pass-through entity tax option. Resident credits for other state taxes are allowed. |
| Ohio | Yes – taxed as ordinary income | Ohio taxes personal income including K-1 distributions. Ohio’s state income tax covers residents on all income, nonresidents on OH-source. Ohio allows a credit for taxes to other states. Note: Ohio also has a Commercial Activity Tax (CAT) on gross receipts that can hit large businesses (including pass-throughs) at the entity level, but that’s not an individual income tax. Some cities in Ohio have local income taxes that might tax K-1 income if you live there. |
| Oklahoma | Yes – taxed as ordinary income | OK taxes K-1 income as part of individual income. It follows federal treatment and taxes residents on all, nonresidents on OK-source. Oklahoma has an elective pass-through entity tax for SALT workaround now. Standard credit for taxes paid elsewhere for residents. |
| Oregon | Yes – taxed as ordinary income | OR taxes K-1 income for residents and Oregon-source for nonresidents. Oregon does not have a general sales tax, but its income tax is straightforward and high-tiered. No special extra entity tax on pass-throughs (except a minimum tax on some S-corps based on sales, which is modest). Oregon also added an optional pass-through entity tax recently for SALT cap workaround. Credits allowed for other state taxes. |
| Pennsylvania | Yes – taxed as personal income (flat rate) | PA taxes K-1 income at a flat 3.07% rate as part of personal income. One quirk: Pennsylvania separates classes of income and doesn’t allow losses in one class to offset income in another. Partnership/S-corp income is usually classified as either “business income” or “rents/royalties” etc., and losses can only offset same class. But for most, it’s taxed simply at 3.07%. PA does not offer a credit for taxes paid to other states on business income for residents (credit is generally only for wage or business income if the other state’s tax rate exceeds PA’s and you pay it – PA’s rules are a bit complex on credits). Also, municipalities in PA (like Philadelphia) may tax business income separately (Philly has a School Income Tax on unearned income for residents, which can include pass-through income). Generally, though, expect to pay PA’s flat tax on your K-1 as resident (plus local if applicable). Nonresidents pay on PA-source K-1 income. |
| Rhode Island | Yes – taxed as ordinary income | RI taxes K-1 income for residents; source income for nonresidents. Rhode Island requires withholding on partnership/S-corp income for nonresident owners (with a credit to them). It also offers an elective pass-through entity tax. Resident credit for other state taxes is allowed. |
| South Carolina | Yes – taxed as ordinary income | SC taxes personal income including K-1 allocations. Conforms to federal definitions. SC allows a resident credit for taxes paid to other states. It also has an elective pass-through entity tax (3% in SC) that owners can opt into for SALT cap workaround. |
| South Dakota | No personal income tax | No state income tax. SD does not tax individual K-1 income. (It does have a bank franchise tax and other business taxes, but nothing on personal pass-through income.) |
| Tennessee | No personal income tax | Tennessee has no personal income tax on wages or business income. (Until 2020, TN had the Hall Tax on interest/dividends, now fully repealed.) So K-1 business income is not taxed to individuals. Note: TN does levy franchise and excise taxes on entities, including LLCs and partnerships, at the entity level (excise 6.5% of income, plus franchise on capital). So if your K-1 is from a Tennessee entity, that entity likely paid taxes already. But as a Tennessee resident individual, you owe nothing on the K-1. If you’re a TN resident with K-1 from another state, you’d pay that state and Tennessee has no tax/credit to consider. |
| Texas | No personal income tax | No state personal income tax. Texas does not tax individual income, including K-1 distributions. (However, Texas charges a franchise margin tax on entities’ gross margin above certain revenue, so partnerships and S-corps doing business in TX might pay that. But no personal tax on owners.) If a Texan has K-1 income from another state, they owe that state’s tax as applicable. |
| Utah | Yes – taxed as ordinary income (flat rate) | Utah taxes K-1 income at a flat 4.85% (2025 rate) for individuals. It follows federal pass-through treatment. Utah allows credits for taxes paid to other states for residents. Utah does not allow composite returns (nonresident owners generally must file individually or the entity withholds), but now has an elective pass-through entity tax for SALT workaround. |
| Vermont | Yes – taxed as ordinary income | VT taxes K-1 income for residents and VT-source for nonresidents. Vermont requires withholding on nonresident owners’ income unless they file an agreement. It also allows an elective entity-level tax. Credits for out-of-state tax paid are allowed for residents. |
| Virginia | Yes – taxed as ordinary income | VA taxes personal income including K-1 distributions. Virginia largely conforms to federal definitions, with minor adjustments. Virginia allows a credit for taxes paid to other states. VA also recently enacted an elective pass-through entity tax. Nonresident owners can join composite returns in VA in lieu of filing separate. |
| Washington | No personal income tax (but see note) | Washington State has no personal income tax on wages or ordinary income, so it does not tax K-1 income on individuals. Note: In 2021, WA introduced a 7% tax on long-term capital gains over $250k (per individual, from sale of certain assets). While officially not called an income tax, it functions like one on capital gains. If your K-1 includes a large capital gain allocation that puts you over the threshold, a WA resident might owe that 7% on the portion of gains above $250k. (Everyday K-1 income or smaller gains are unaffected.) Aside from that, no tax on K-1 income. Washington does have a gross receipts Business & Occupation (B&O) tax on businesses, which can hit partnerships/S-corps at entity level, but no personal tax. |
| West Virginia | Yes – taxed as ordinary income | WV taxes K-1 income for residents and WV-source for nonresidents. It conforms to federal treatment and allows credit for taxes paid to other states for residents. No special entity-level taxes on pass-through income (WV does have a small severance tax if the income is from natural resources, but that’s separate). |
| Wisconsin | Yes – taxed as ordinary income | WI taxes K-1 income as part of personal income. Wisconsin has some unique options: it was one of the first to allow an entity-level tax election for pass-throughs (the “Entity-Level Tax” or ELT), which many S-corps/partnerships use so that the entity pays 7.9% tax and the owners get a credit (again, a SALT workaround). If that election is made, your WI K-1 will show a credit and you may not pay additional WI personal tax on that income. If not elected, you pay as usual on your return. WI also requires withholding for nonresident owners (or composite filing) if not opting into the ELT. Resident credit for other state taxes is allowed. |
| Wyoming | No personal income tax | No state income tax. WY does not tax individual K-1 income. (Wyoming, like others, might have some franchise fees for LLCs, but no income tax.) |
(Table note: All states that have a personal income tax treat K-1 pass-through income as taxable to the individual, except that certain states impose part of the tax at the entity level or have slight variations as noted. Always double-check current state laws if you have a significant K-1, as tax laws can change.)
As you can see, if you live in a state with an income tax, that state will include your K-1 income in your taxable income. If your K-1 comes from an entity operating in a different state, that other state may tax it too, but you’ll typically get a credit from your home state to avoid double taxation. The only states where a K-1 wouldn’t affect your personal state tax are the ones with no income tax (and even then, watch out for other states’ claims on the income).
Next, let’s discuss some common mistakes and special situations you should be aware of when dealing with K-1s and state taxes.
Beware: Common Pitfalls with K-1 and State Taxes (And How to Avoid Them)
Filing taxes with K-1 income can get tricky. Here are some common pitfalls taxpayers encounter, and tips on how to handle them:
1. Ignoring Out-of-State K-1 Filing Requirements: One of the biggest mistakes is to assume that just because you live in one state, you only file there. If your K-1 shows income from another state, you may need to file a nonresident return for that state. Many people overlook that tiny $1,200 of income from, say, Utah on a partnership K-1 – until a year or two later, they get a letter from Utah tax authority with a bill (plus penalties) for unfiled taxes. How to avoid: Read any “state schedule” or footnotes that come with your K-1. Large partnerships often include a partner report by state. If not, look at the partnership’s business locations or ask the K-1 issuer. When in doubt, file in the state if the income is above that state’s minimum threshold. It’s better to file a zero-tax return (if below taxable amount) than to ignore it if a filing was technically required.
2. Double Taxation by Two States (Not Taking Credits): If you do get taxed by two states, make sure to claim the credit for taxes paid to other states on your resident return. A common error is when using tax software, people don’t complete the credit section, ending up paying both states in full. Or they pay the other state after filing their home state and forget to amend for a credit. Solution: Always prepare the nonresident state return first to see how much tax you owe elsewhere, then claim that on your home state return. Keep copies of other state returns as proof if needed. Nearly every state has a schedule for this credit (often called “Credit for Tax Paid to Another State”).
3. Missing Withholding or Estimated Tax Requirements: K-1 income typically comes with no withholding (unlike a W-2 job where state tax is taken out each paycheck). This means you might need to pay estimated taxes throughout the year to avoid underpayment penalties, especially if the K-1 income is large relative to your other income. Additionally, if you’re a nonresident owner, some states have withholding – for example, California might have already withheld 7% of your K-1 distribution for state tax. If you ignore filing in CA, you’ll never claim that refund if 7% was too much. Tip: Check your K-1 or accompanying statements for any state tax withheld on your behalf. File in that state to get credit or a refund. And if you expect similar K-1 income next year, consider quarterly estimated payments in your state to cover the additional tax, so you don’t get an unpleasant surprise or penalty at tax time.
4. Not Filing When K-1 Shows a Loss: If your K-1 shows a loss (especially in multiple states), you might think, “No income, so no need to file in that state.” Often, states don’t require a return if you had no taxable income in that state. However, consider filing anyway if you have carryover losses that could offset future income. For example, say you’re a partner in a venture with initial losses apportioned to many states. If you don’t file returns in those states, you might not have those losses “on record” to use later when the venture becomes profitable. Filing a return (even with zero tax due) can establish your ability to carry forward that state’s share of losses. If you skip it, some states might disallow the loss carryforward. Advice: Consult with a tax advisor on whether to file in loss years for future benefit. It may be worthwhile if you expect future income from that source.
5. Assuming K-1 Income Is Treated the Same Everywhere: As we saw in the state table, not every state treats the various components of K-1 income identically. Some states don’t recognize certain federal deductions (like if your partnership took a Section 179 deduction that gave you a loss on K-1, a state might add that back). Others might tax things differently (e.g., that Washington capital gains tax, or New Hampshire interest/dividend). Pitfall: Using your federal K-1 amounts directly on each state return without adjustments could be wrong. Solution: If your software provides state K-1 input sections, use them. If filing by hand, carefully read state instructions for differences. For big dollar amounts, consider a tax professional’s help to navigate differences in depreciation, etc., especially in states known for decoupling from federal tax law (like CA, NJ, NY).
6. Forgetting City/Local Taxes: State taxes aren’t the only game in town. Certain cities (like New York City, Philadelphia, various cities in Michigan and Ohio) have local income taxes that might apply to K-1 income if you live or do business there. For instance, NYC has an Unincorporated Business Tax (UBT) on partnerships (if you operate a partnership in NYC), and Philadelphia has a local tax on unearned income for residents. While these are specialized situations, it’s a pitfall if you live in those localities and overlook this. Fix: Be aware of your local tax rules. Often, these don’t apply unless you’re actually carrying on the business there (Philadelphia’s School Income Tax, however, hits all passive income of residents). A local tax advisor can clarify if this applies to you.
7. Late K-1 Arrival Leading to Rushing/Errors: K-1s often arrive late in the tax season (March or even April), because partnerships and S-corps have later filing deadlines or extensions. This can lead to rushing to meet April 15, which increases error risk, especially for multi-state issues. Tip: If you anticipate a complicated K-1, consider filing an extension for your tax return. An extension is time to file (not pay), so pay an estimate by April 15 if you owe, but take time to accurately prepare multi-state filings with the K-1 info once you have it. It’s far better to file correctly on extension than to amend returns later for multiple states.
By being mindful of these issues, you can avoid most unpleasant surprises related to state taxes on your K-1 income. Next, let’s solidify understanding with a few real-world examples illustrating how K-1 income plays out across state lines, followed by a quick look at pros and cons of pass-through taxation.
From Theory to Practice: K-1 State Tax Scenarios
To make this concrete, let’s go through a few typical scenarios and see how the state tax situation unfolds. We’ll use simple examples and tables for clarity.
Example 1: Partnership K-1 – Resident in One State, Business in Another
Scenario: Alice lives in Georgia, but she’s a 50% partner in a partnership that operates exclusively in North Carolina. In 2025, the partnership earned $100,000 of taxable income. Alice’s K-1 shows $50,000 of ordinary business income allocated to her.
Federal: Alice will report $50,000 of partnership income on her federal 1040 (Schedule E). It will be taxed at her federal marginal rate as usual.
State – North Carolina (source state): Because the income is earned in NC, the partnership will issue a K-1 indicating $50k NC-source income for Alice. Alice, as a nonresident of NC, must file a North Carolina nonresident return reporting that $50,000. Suppose NC’s tax on that amount (for her bracket) is around 5% = $2,500. She’ll owe NC $2,500 (maybe slightly less after personal exemptions, but roughly).
State – Georgia (resident state): Alice also files a Georgia resident return reporting her worldwide income, including that $50k. Georgia’s state income tax on $50k at her rate might be about 5.75% = $2,875. However, Georgia will provide a credit for the taxes she paid to NC on that income. She paid $2,500 to NC, and GA would have taxed $2,875 on it; GA will give credit for the $2,500. So in Georgia, she’ll pay only the net $375 difference (because GA’s rate is higher than NC’s in this example). If it were reversed (source state tax < home state tax), the credit covers it entirely and you pay the remainder to home state.
Total state tax: effectively ~5.75% (the higher of the two states’ rates). Alice ends up paying $2,875 total, with $2,500 going to NC and $375 to GA. If NC’s tax had been higher than GA’s, she’d pay the higher amount but GA would cap the credit at GA’s tax. In no case does she pay double $2,500 + $2,875; the credit prevents that.
Summary Table – Alice’s Situation:
| North Carolina (Source) | Georgia (Resident) | |
|---|---|---|
| K-1 Income Taxable | $50,000 (NC-source) | $50,000 (all income, including NC) |
| Tax Rate (assumed) | 5.0% (nonresident rate) | 5.75% (resident rate) |
| Tax Calculated | $2,500 | $2,875 |
| Credit for Other State | n/a (no credit for nonres) | -$2,500 (credit for NC tax paid) |
| Tax Actually Paid | $2,500 to NC | $375 to GA |
Alice had to file two state returns, but the credit system ensured she didn’t pay double tax on the same $50k. She essentially paid Georgia’s higher rate in the end.
Example 2: S-Corp K-1 – Living in No-Tax State, Business in Tax State
Scenario: Bob is a resident of Texas (no personal income tax). He is a 30% shareholder of an S-Corporation based in California. The S-corp does all its business in California. Bob’s K-1 from the S-corp shows $100,000 of business income allocated to him (good year!). Also, the S-corp already paid California’s 1.5% franchise tax on the entire profit at the corporate level, but that was just $1,500 (on Bob’s share of income it’s effectively $1,500).
Federal: Bob reports $100k K-1 income on his 1040 and pays federal taxes on it as appropriate.
State – Texas: Texas doesn’t tax income, so Bob does not have to file a Texas return or pay Texas tax on this. (Texas will, however, tax the S-corp itself via the franchise tax if applicable, but Bob doesn’t handle that on a personal return.)
State – California: California will treat Bob as a nonresident owner with California-source income. He must file a California nonresident return reporting the $100,000. Let’s say CA’s tax on that (for his income level) is around 9.3% = $9,300. California will apply a credit for the $1,500 franchise tax the S-corp paid? Actually, no – that franchise tax is a corporate-level charge; it doesn’t directly reduce Bob’s personal tax. Bob still owes the full personal tax on $100k. So Bob pays $9,300 to California. (If the S-corp had withheld some amount for him as a nonresident, he’d claim that, but ultimately the tax on $100k is $9,300.)
Credits: Since Bob’s home state is Texas which has no tax, there’s no home state credit scenario. He just pays CA and that’s it.
Bob’s total state tax on the K-1 income: $9,300, all to California. Essentially, living in a no-tax state didn’t save him here because the income was earned in California. If it were the opposite (business in TX, living in CA), then CA would tax it because he lives there, and TX wouldn’t tax (no credit needed because TX had none).
Summary Table – Bob’s Situation:
| California (Source) | Texas (Home) | |
|---|---|---|
| K-1 Income Taxable | $100,000 (CA-source) | n/a (Texas doesn’t tax income) |
| Tax Rate (assumed) | 9.3% (CA high bracket) | 0% |
| Tax Calculated | $9,300 | $0 |
| Credit for Other State | n/a (Texas has no tax) | n/a |
| Tax Actually Paid | $9,300 to CA | $0 to TX |
Bob only files a CA nonresident return. His Texas residency doesn’t require a return or offer any credit. The CA S-corp had a small entity tax but that doesn’t reduce Bob’s personal liability (it’s essentially a cost of doing business in CA).
Example 3: Trust K-1 – Different State for Trust and Beneficiary
Scenario: Carol lives in Illinois. She is a beneficiary of a family trust established in Delaware (Delaware is popular for trusts). The trust earned $20,000 of interest and dividend income in 2025 and distributed all $20,000 to Carol (so the trust itself retained no income). Carol receives a K-1 (Form 1041) showing $20,000 of income (let’s say $15k dividends, $5k interest).
Federal: Carol reports $20,000 of investment income on her 1040 (Schedule B for interest/dividends). It’s taxed like any other interest/dividend income would be (qualified dividends at capital gains rates, etc., but that’s federal).
State – Delaware: Does Carol need to file a Delaware tax return? Possibly not in this case – Delaware taxes trust income at the trust level if the trust is considered a DE resident trust, but if all income was distributed, typically the trust gets a deduction and passes taxation to Carol. Delaware personal income tax for nonresidents applies to Delaware-source income. Interest and dividends aren’t “sourced” to Delaware just because the trust is there. They are typically sourced to the state of residency of the recipient (for personal income). So Carol, being a nonresident of DE, likely does not owe DE tax on this trust income. The trust itself might have filed a DE trust return, but with distribution deduction, maybe no tax due (or maybe nominal). Delaware doesn’t tax Carol as a nonresident on just investment income coming through a trust.
State – Illinois: Carol, as an IL resident, reports the $20k on her Illinois return. Illinois taxes personal income at 4.95% flat. So Carol would owe $990 to Illinois on that $20k. Illinois will allow a credit for tax paid to another state if the income was taxed elsewhere and if the other state’s tax was on income that Illinois also taxes. Here, Delaware didn’t tax Carol on it (assuming no withholding or anything). So no credit is needed – she just pays Illinois.
If Delaware had taxed the trust (say the trust retained income and paid DE tax, or DE tries to tax even distributed income at trust level), Carol might not directly get a credit for that on her IL return because she didn’t pay it, the trust did. But generally, states avoid double taxing trust income: it’s either taxed at trust or beneficiary, not both. In our scenario, beneficiary pays in IL, trust likely pays little in DE.
Result: Carol pays $990 to Illinois. Delaware doesn’t tax her personally. (If Carol also lived in say New York City, she might owe NYC resident tax on it too, but she doesn’t.)
Summary Table – Carol’s Situation:
| Delaware (Trust State) | Illinois (Resident) | |
|---|---|---|
| K-1 Income Taxable | $0 (no direct tax on Carol) | $20,000 (all income, incl. trust distribution) |
| Tax Rate | n/a (trust paid or DE doesn’t tax nonres interest) | 4.95% flat IL |
| Tax Calculated | $0 | $990 |
| Credit for Other State | n/a | n/a (no other state tax paid by Carol) |
| Tax Actually Paid | $0 by Carol to DE | $990 to IL |
This scenario shows that sometimes only one state taxes the income (in this case Illinois). Trust and estate distributions often work that way: you pay tax where you reside. If the trust were in a state that did try to tax the beneficiary or trust income as well (California, for example, might tax a trust if trustee or assets are there), then Carol might have a different scenario. But typically, one or the other.
Example 4: Multiple State K-1s – Small Amounts in Many States
Scenario: Dan is a partner in a large investment partnership (a fund) that operates or invests in many states. He lives in Ohio. His K-1 package shows income from 10 different states, each in the range of $500 to $5,000, totaling $20,000 of income (his share). For simplicity, assume all ordinary income.
Federal: Dan reports the $20k on his 1040, pays federal tax.
State – Ohio: As a resident, Ohio will tax the full $20k at its state rate (~3% average effective for that amount, so ~$600). Ohio also would allow a credit for taxes paid to other states on that $20k. Dan will likely have some tax in those other states.
Other States: Let’s say among those 10 states, the ones with $5k might be higher tax states (like CA, NY), and the ones with $500 might be lower or no-tax states. Dan examines each:
If any state amount is below that state’s filing threshold, Dan might choose not to file in that state. For example, New York might require a nonresident return if you have any amount of income, but some states like Indiana might not require filing if income under $1,000. Dan should check thresholds.
Suppose 5 of the states require filings. He files nonresident returns in those, paying maybe a couple hundred dollars to each (like $5k in CA -> ~$450 tax, $5k in NY -> ~$330 tax, $3k in IL -> ~$150 tax, $3k in NJ -> ~$180, $2k in GA -> ~$100, for instance).
Total paid to other states might be around $1,200.
Ohio Credit: Dan will then claim credit on his Ohio return for those taxes (up to what Ohio’s tax on that portion would be). If Ohio’s tax on the out-of-state portions (say $15k of that $20k) is, e.g., $450, and he paid $1,200 out-of-state, Ohio will credit up to $450 (and he effectively ends up paying the higher totals of those states). In some cases, he might not get full credit if other states’ taxes exceeded Ohio’s on that portion. But the key: he doesn’t pay Ohio tax on income already taxed out-of-state beyond his rate.
Outcome: Dan might pay, say, $600 total state tax between Ohio and others, plus extra $ (if other states had higher rates that credit didn’t fully cover). Actually if out-of-state taxes were higher, he ends up paying them and not Ohio. If out-of-state total was lower, he pays Ohio the difference. It’s complex but definitely he had to track and file many returns, which is a hassle.
Takeaway: For multi-state K-1s with small amounts, the effort of filing many returns can be burdensome. Some states allow a composite return where the partnership files one return covering all nonresidents (you pay your share through the partnership). Dan’s partnership might do that. In that case, Dan might not have to file individually in those states – the composite return took care of it, and usually then no credit on home state because composite often means the partnership paid it on Dan’s behalf (though Ohio might allow it if you can show tax paid). It’s a strategy to simplify multi-state filings.
These examples show the variety of ways K-1 can play out. Now, given all this, you might wonder: is having K-1 income good or bad? Let’s briefly weigh some pros and cons, especially as they relate to taxes.
Pros and Cons of K-1 Pass-Through Income (Tax Perspective)
Pass-through entities (which issue K-1s) have certain advantages and disadvantages, particularly when comparing to other business forms or income types. Here’s a quick rundown:
| Pros of K-1 Pass-Through Income | Cons of K-1 Pass-Through Income |
|---|---|
| Single Layer of Taxation: Income is only taxed once at the owner level, avoiding the double taxation of C-corporations (which pay corporate tax and then shareholders pay tax on dividends). This often results in lower overall tax burden, especially federally. | Complex Multi-State Tax Filings: If the business operates in multiple states, owners might have to file tax returns in many states for their K-1 income. This complexity can be time-consuming and costly (professional fees or software). |
| Flow-Through of Losses: Losses on K-1 can often be used to offset other income (subject to passive activity rules). This can reduce taxes if your venture isn’t immediately profitable. (A C-corp’s losses don’t directly benefit shareholders.) | No Tax Withholding: K-1 income typically comes with no tax withheld. Owners must manage their own estimated taxes. Without careful planning, this can lead to underpayment penalties or large tax bills at filing time. |
| Potential Tax Rate Benefits: Certain K-1 income (like qualified dividends or long-term capital gains flowing through a partnership or trust) retains its character and may be taxed at lower rates. Also, qualified business income from K-1 may be eligible for the 20% QBI deduction (199A) on federal returns, reducing effective tax rate. | State-Level Surprises: Some states impose entity-level taxes or fees (e.g., franchise taxes, LLC fees) that effectively reduce your share of income. While not directly on your personal return, they cut into profits. And as an owner, you might still be paying full tax personally without credit for those entity-level taxes (with some exceptions). |
| Flexibility in Tax Planning: Partnerships especially can allocate income, deductions, and credits in flexible ways (as long as rules are met). Trusts can time distributions to manage tax brackets of beneficiaries. Pass-throughs offer more tax planning levers. | Delayed and Detailed Tax Forms: K-1s often arrive late (due to extended entity returns), which can delay your personal filing or force extensions. The forms themselves can be quite detailed (multiple pages of codes) and prone to input error if you’re not careful. |
| SALT Cap Workaround via PTE Taxes: Recently, many states allow pass-through entities to elect to pay state tax at the entity level (on owners’ behalf) so that the state tax becomes a business expense (fully deductible federally) rather than a limited itemized deduction. This is a unique pro for K-1 entities post-2018 tax changes, potentially lowering federal taxable income for owners. | Self-Employment Tax (for Partnerships): If you’re a general partner or LLC member, your K-1 business income may be subject to self-employment tax (Social Security/Medicare) on the federal side. (S-corp K-1 income is not SE taxable, which is why many choose S-corps.) Some states also have additional payroll taxes or require estimated payments for SE tax. This isn’t a “state tax” per se, but it’s a con of K-1 income vs, say, pure investment income. |
Overall, receiving a K-1 means you’re likely part of a business or investment that has tax advantages over traditional corporations, but it also means greater responsibility in tax reporting. Especially at the state level, you need to be vigilant.
Finally, to address any remaining doubts, let’s answer some frequently asked questions about K-1 forms and state taxes.
Frequently Asked Questions about K-1 and State Taxes
Do I have to pay state tax on K-1 income?
Yes. If your state has an income tax, you must report and pay tax on K-1 income just like any other income. States with no income tax won’t tax your K-1, but other states where the income was earned might.
Will I need to file tax returns in multiple states for one K-1?
Yes. If your K-1 reports income from multiple states, you may need to file a nonresident return in each of those states. Most states require a filing if your income there exceeds a small threshold.
Can K-1 income be taxed by two states?
Yes. The same K-1 income can be taxed by both a source state and your home state. However, your home state will usually give you a tax credit for the amount paid to the other state, to avoid double taxation.
Do states treat K-1 income differently than W-2 income?
No. Generally, states tax K-1 pass-through income at the same rates as wage income. The difference is W-2 income has withholding and usually only one state (or two in commuter cases) involved, while K-1 can involve multiple states without withholding.
Is K-1 income considered earned income for state taxes?
No. K-1 income is typically considered passive or investment income for many purposes, and it is not “earned” income for credits like the Earned Income Credit. But states still tax it as part of your total income.
If my K-1 shows a loss, do I need to file in that state?
No. If you only have a loss in a nonresident state, you often won’t owe tax and might not be required to file. But consider filing to record the loss, which could potentially offset future income in that state.
Do I owe state tax on K-1 income if I live in a no-income-tax state?
No. Your home state won’t tax it if there’s no income tax. But yes, you could owe tax to other states where the income comes from. Living in a tax-free state doesn’t exempt you from other states’ taxes on your K-1.
What happens if I ignore a K-1 from another state?
You might get a tax bill later. States cross-match data. Yes, eventually the state where the K-1 income was sourced could send you a notice for unpaid taxes, plus penalties and interest for not filing.
Do I need to pay estimated taxes for state if I have K-1 income?
Yes. If the K-1 income is significant and no tax was withheld, you should pay quarterly estimated taxes to your state. This helps avoid underpayment penalties when you file your annual return.
Can a K-1 affect my state tax refund?
Yes. If a K-1 adds income, it can reduce your refund or even turn it into a balance due. Your state refund is calculated on your total tax liability; more income means more tax owed, lowering any refund.
Are trust or estate K-1s taxed in my state or the trust’s state?
Usually in yours. If you get a K-1 from a trust or estate, yes, your home state will tax that income as part of your income. The trust’s state typically taxes the trust on any undistributed income, not the distributed part that came to you.
Do all partners/shareholders have to file separate state returns?
No, not always. Some states allow composite returns or entity-level tax elections. In a composite return, yes, the partnership or S-corp files one return and pays for all nonresidents, so individuals don’t file separately in that state.
Does a K-1 count as proof of income for state residency?
No. A K-1 is just a tax form. It doesn’t by itself establish residency. Residency is determined by where you live. Yes, if you show K-1 income from a state, that state might check if you should file as a nonresident, but it doesn’t make you a resident.
Is K-1 income subject to local city taxes?
Sometimes. If you live in a locality with an income tax (like New York City, some Ohio or Pennsylvania cities), yes, your K-1 income usually gets included in local taxable income. Some cities also tax businesses directly (e.g., NYC UBT on partnerships).