Tax Residency Rules by State

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Tax Residency Rules by State

Millions of Americans move to other states each year, whether it’s to take a new job, be closer to family, or live somewhere with lower taxes. And with COVID-19 forcing more employees to work virtually, many of them now have few restrictions on where they can call home.

However, if you’ve moved to a new part of the country within the past few months, you’ll want to research the tax residency rules for both your new state and your old one—each state has its own code. Getting up to speed now can help you avoid big hassles down the road.

Key Takeaways

  • Your domicile is the state you consider your home, although you might also be deemed a “statutory resident” of another state if you spend significant time or earned revenue there.
  • Because COVID-19 caused many employees to leave their home states for other states, telecommuters must be aware of residence regulations in both jurisdictions.
  • Those who migrated to another state permanently throughout the year may be required to submit a part-year resident return in each state.

Residency Status 101

You are a resident of a state for income tax purposes if you fulfill one of the following conditions:

  • The state is your “domicile,” the location you perceive as your genuine home and aim to return to after any absences.
  • Even if you live abroad, you are deemed a “statutory resident” under state law if you spend more than half the year in the state.

You can only have one domicile at any one moment. However, this does not preclude another state from claiming you as a resident for tax purposes. If you’re relocating between states, registering your new residence as soon as possible might help you avoid any uncertainty about which states need you to submit a tax return.

In the worst-case situation, failing to establish your new principal home may result in you paying taxes on your whole income in both your new and prior states. According to Baker Tilly, more states have begun to audit former residents who have moved their domicile, making it even more important to do things right.

How will you establish your new home? States will consider your workplace as well as the type of your job—whether it is permanent or temporary. Here are some further measures you should take:

  • Change your postal address and have invoices and financial statements sent straight to your new location.
  • Get your new state’s driver’s license.
  • You must register to vote in your new state.
  • Close any local bank accounts in your former state and create a new one in your new one.
  • Purchase or rent a property in your new state and sell any properties in your previous state.
  • Keep track of how many days you spend in your new state compared to your prior one.
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Depending on where you reside, state revenue authorities may check into your personal and financial data, including what church you attend and if you’ve visited a local doctor. The more proof you have confirming your presence in a new state, the more difficult it will be for the prior state to claim you as a resident.

Moving to Another State

According to our study, seven states do not have a personal income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Residents of New Hampshire are only taxed on dividend and interest earnings, but residents of Washington state are only taxed on capital gains income if they are in a high enough tax band. Nonetheless, if you earned money in the state—whether via wages or self-employment—or produced revenue from real property in the state, you must file a return in most states.

Even if you create a new residence, you must usually submit a return in both states for the year you relocated. You should research how each state identifies “full-year” and “part-year” residents so you know which form to fill out. Some states consider you a full-year resident if you have resided there for at least 183 days, whereas others have other requirements. Making a record of how many days you spend in each one will save you time and effort later on.

A state where you spent part of the year may require you to disclose all income, just as if you were a full-year resident; when you compute the tax, the amount drops depending on the length of time you stayed in that state. In other countries, you would first calculate how much money you received while residing there before calculating the tax.

Whether you relocate to a nearby state but continue to work in your previous state, check to see if the two governments provide income tax “reciprocity.” This is a specific agreement between states in which you only pay taxes in the state where you live as long as your employment in the other state is your only source of income. Other kinds of income, such as rental income or lottery wins, are often excluded.

Living and Working in Different States

What happens if you work in a state other than your home state? In most states, you must file a non-resident return in the state where your firm is based (if you get a W-2, your employer will most likely withhold taxes during the year). You’ll almost certainly be required to file a resident tax return in the state where you live.

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Fortunately, most states provide a credit that may be used to offset taxes paid to another state. Unfortunately, not everyone does, and the state may not apply the credit to investment income. Residents of New York who work in another state, for example, may have their interest and profits taxed twice.

People who reside in a state that gives income tax reciprocity to adjacent states have it considerably easier. You only need to file a return in the state where you reside if your sole income came from wages earned in a state with such an agreement.

Residents of Illinois, for example, are not required to pay tax on income earned in Iowa, Kentucky, Michigan, or Wisconsin; instead, they must submit a return in their home state. If any of those states withheld income tax during the year and you resided in Illinois, you’d be entitled for a refund.

COVID-19 and Temporary Moves

COVID-19 office closures meant that many employees were no longer tied to their home residence—they could now work from anyplace that had internet access. However, staying in another state for an extended length of time might have tax implications, so you must be cautious to submit the correct taxes in each state.

The 183-day and Convenience Rules

For tax reasons, a state with a 183-day residence limit will consider you a full-year resident if you spend more than half the year there. Assume you reside in California, but since your employer’s office is closed, you’ve opted to live with your sister in Illinois starting in April. You are deemed a dual resident since you spent more than 183 days in the former.

To avoid that predicament in the future, just spend less than 183 days in your “temporary” state—in our case, Illinois—which may mean returning to your residence for the requisite period of time or even spending a few weeks in another state entirely. If you decide to remain in Illinois, you might establish a residence there to prevent any income tax demands from California.

With states losing significant revenue as a result of COVID-19, experts like Kim Rueben, project director of the State and Local Finance Initiative, an UrbanInstitute project in the Urban-BrookingsTax Policy Center, predict that many states will be aggressive in claiming income tax from residents who spent the majority of the year elsewhere. As a result, you must be cautious about submitting taxes in any state where they are needed.

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Telecommuters face significant difficulties in jurisdictions with “convenience norms.” Employers in six states—Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—can withhold income tax even if the employee does not reside there. That might be a nasty revelation for employees who have flown to another state only to discover that the state where their employer is headquartered wants them to pay up.

Snowbirds

What about so-called “snowbirds,” who flee their colder regions in search of brighter weather and, in some cases, cheaper tax rates down south? If your permanent residence is in New York and you go to Florida (a no-income-tax state) during the colder months, New York is likely to wish to tax all of your income for the year, not just what you earned inside its boundaries.

To prevent this, you must establish a habitation in Florida—voting, acquiring a driver’s license, and registering a vehicle are all smart places to start. New York, renowned for its stringent audits, is also likely to verify that your Florida house is of similar size to what you inhabit up north. You must also spend at least 183 days each year in Florida. If the New York State Department of Taxation comes after you, you’ll need to present receipts or other evidence to back up your claim.

There are several pitfalls, particularly if you spend part of the year in a state with high taxes. If you want to change your domicile while residing in your previous state for part of the year, it may be worthwhile to contact with a tax professional. The last thing you want is to make a mistake and have unpaid tax obligations pile up without your notice.

The Bottom Line

Knowing where to submit taxes is determined by state residence requirements. If you’ve just relocated or spend a substantial amount of time away from your primary residence throughout the year, you’ll need to familiarize yourself with each one’s criteria. Because they are intricate, it may be worthwhile to contact a tax specialist. Those thinking about buying a second property in another state should look into the tax ramifications.

This helpful table, which was prepared using data from various government websites and the tax preparation software provider TaxAct, can assist you. TaxSlayer.com is a good resource for locating your state (or, in the case of D.C., local) tax website.

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