If you work remotely in a state different from where you reside, or you are thinking about changing your residence from one state to another, you may be at risk of a state tax conundrum. State tax collectors are highly motivated to make sure that their state receives as many tax dollars as possible. To avoid confusion and a potentially time-consuming problem, lay good groundwork with the following knowledge.
Tax residency is usually based on the concept of domicile. You may have many homes, but you can only have one domicile. A domicile is the place you intend to be your permanent home and where you intend to return after being away. When these cases go to court, they are often decided by determining a person’s intentions regarding their domicile. Consider this hypothetical example:
Illinois resident Steve Smarty moves to an apartment to pursue a lucrative job opportunity in Arizona leaving his wife and children behind in St. Paul, Minnesota to finish the school year. Steve reasoned that since he spent more than 70 percent of his time in Arizona, he could file his state return there and take advantage of its lower tax rate. The state of Minnesota could easily disagree with Steve’s assumption, since on the surface Steve may intend for his permanent home to remain where his family is, in Minnesota. In this case, both states will have a claim on Steve’s income.
Know the rules before you move
Before moving or working remotely, research the residency rules in your home and destination states. They vary from state to state. Some states have specific guidelines on the number of days its residents must be in the state. Others are less exact.
Keep good records
If you say you are in a state for a certain number of days, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, defending your claim gets harder.
Demonstrate your intentions
If you’re going to file as a resident of a new state but also have a potential tax claim in another state, you must be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:
- Change your driver’s license to reflect your new home.
- Register to vote in your new state.
- Relocate your checking and savings accounts to a local bank.
- Use local service providers. Start going to a new, locally-based doctor, dentist, or church.
- Make sure as many things near and dear to your heart are located in the new state. These can include your loved ones, pets, or favorite personal items.
- Spend the required amount of time in your new home, according to the state’s tax laws.
The last thing you want is a letter from a state auditor looking for income tax. By being prepared, you can greatly reduce the risk of a surprising tax bill. Reach out if you’d like to discuss your unique situation.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.