I live in Arizona and am an employee of a company based in Washington, DC. I noticed on my W2 that they did not withhold any state taxes at all for last year.

Is it legal for them to fail to withhold state taxes for an out-of-state employee?

Second question if you don't mind: I have Foreign Earned income and Capital Gains but don't need to file schedule D. To find my tax, I use the FEI worksheet, adding that number to the Qualified Divs/Cap Gains worksheet, then use that ultimate number on 1040? Just double-checking. This is a new level of complexity for me!

Thanks very much for your advice and expertise!

No, it is NOT legal. The employer should withhold those taxes.

If you have foreign EARNED income, you report it either with the WAGES (Line #7) or on Line #21 (Other Income).

You MAY want to get professional tax help. Contact me at email below if you want my help!