Residency and Multi-State Income Taxation
In the United States, each state has its own income tax laws. States may impose income tax on individuals based on two general concepts: 1) sourcing – where income is taxed based on where it is earned or sourced, and 2) residency. Residency can create challenges for taxpayers who have homes and spend time in multiple states, as they may be subject to tax in multiple states. The determination of residency for multi-state income taxation is a complex issue, and there is no one-size-fits-all answer. However, there are a few key factors that states consider when determining residency.
The first factor that states consider is domicile. Domicile is the place where a taxpayer has their permanent home; a taxpayer only has one domicile. It is the place where a person intends to return to after being away. When a taxpayer moves to a new state or country, it can be difficult to prove that their domicile has changed. However, some factors that may show domicile (or a change in domicile) are:
- Length of time spent in the state: The longer a taxpayer has lived in a state, the more likely it is that the taxpayer will be considered domiciled there. For example, state auditors often ask, where does the taxpayer spend the majority of his or her time?
- Intent to remain in the state: If a taxpayer has made plans to stay in a state for the foreseeable future, the taxpayer is more likely to be considered domiciled in that state.
- Personal ties to the state: Having strong personal ties to a state is an important consideration as well, such as:
- Owning property in a state,
- Being registered to vote in a state,
- Having that state’s driver’s license, and
- Having children in school in the state.
These are just a few examples that could demonstrate a taxpayer is more likely to be considered a domiciliary of a state for tax purposes. Additionally, personal ties are likely to show an intent to remain in a state as well.
It is important to note that these are just some of the factors that may be considered by states when determining domicile for state taxation. The specific factors that will be considered will vary from state to state. If you have any questions about your residency status, please reach out to your tax advisor at Topel Forman.
The second factor that states consider is physical presence. Physical presence is the amount of time that a person spends in a state during the year. Many states have some version of a rule often referred to as “statutory residency.” In many states, the rule is generally that if a person spends more than 183 days in a state during the year, they are considered a resident of that state for income tax purposes. Some states have an additional requirement that a taxpayer must also have a place of abode in that state. However, what qualifies as an abode and what does not can often be harder than one would think to determine.
When a taxpayer is considered a resident of a state, then that state will tax the taxpayer on their worldwide income, regardless of where that income is earned. There are a few exceptions to this rule. For example, some states have reciprocal agreements with other states, which means that residents of one state may not be taxed on their income in another state if they meet certain criteria.
While outside the scope of this memo, note that even if you are not a resident of a state, you may still be required to pay income tax on income that is earned in that state. For example, if you work in one state but live in another, you may be required to pay income tax to the state where you work.
Ultimately, taxpayers should be aware that if they are spending time in a non-domicile state, it is possible they could unintentionally trigger that state’s statutory residency rule and could become a resident of that state for the year. This could lead to those taxpayers being residents of multiple states, including the state they are domiciled in, which could subject them to additional state taxation.
Tax Planning Considerations
If a taxpayer is a resident of more than one state, they will need to file a tax return with each state. Some states offer tax credits to residents who must pay income tax in another state. The amount of the tax credit will depend on the state’s laws.
When it comes to a taxpayer who lives in multiple states or even frequently visits multiple states, it is important to consult with your tax advisor at Topel Forman about your residency status and how it can potentially affect your income taxes. Topel Forman can help individuals navigate residency status and how to file taxes in each state.
As discussed in this memo, domiciliary status is not lost by simply moving to a different state. In fact, a domiciliary need not even be present in the state during the taxable year and could have few or no contacts with the state other than an intent to return sometime in the future. As a result, please reach out to your Topel Forman tax adviser if any of the following scenarios apply to you:
- If you are planning to try and change your tax residency to another state keeping in mind establishing residency may not be difficult; however, breaking domicile can be challenging.
- If you own properties in multiple states, intend to purchase property in a new state, or if you plan to sell property.
- If you are suddenly spending time in a new state. After all, recent events such as COVID have changed how we work, and the ability to work from anywhere can lead to state residency issues.
- If you are relocated for work – either temporarily or permanently, or even if you simply have begun traveling more frequently.
- If you plan to retire soon, discussing your current and future residency could be worth discussing.
- Finally, if you are just unsure about your state tax residency or have any questions about state tax residency in general.
If you have questions, please reach out to your Topel Forman contact.