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Specifically, we moved house from Virginia to Indiana at the end of October 2008 -- so were resident in VA for 10 months of the year, then two more in IN. Our employers remained the same throughout the year.

Is it correct that we must file separate income tax declarations in both states?

Yes. You'll file as part-year residents of both states.

And how do we divvy up the income that is being taxed between the two states' tax authorities?

By date received/paid.

Each state has its own way of dealing with this, but the first step in all cases is splitting your income between the states. Then you just go from there. Of course, before you start any of this, do your Federal return.

This is one instance in which I really recommend software. You'll need the Federal and two state versions, but it really simplifies things. If you don't usually use software, take a look at TaxAct For $20 you get the Federal and one state, and I think the other state is about $15 added. This also includes free Federal e-filing. They charge an exhoribant amount for state e-filing, so check the state websites to see if you can file for free through them.

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