By: Iliana Rozon-Liz
With more employees working remotely, it can be an escape to enjoy working from anywhere. If not home, maybe a vacation home? However, many may not realize if they stay in another state for a long period, they could be considered residents of both that state and their home or “domicile” state, resulting in double taxation of all of their taxable income for the year. In this blog, we will discuss the concepts of dual residency and double taxation, including how owning a home in another state can lead to it, and give points on how you can avoid it.
Besides maintaining a vacation home in another state, “dual residency” taxation could result from moving to another state but failing to establish domicile there, moving to another state then returning back to the original state, living in one state while working in another, or relocating to another state on a temporary basis. We recently published a blog that touches upon some of these situations.
Are you a Resident?
A person is considered a resident of a state under the conditions they are domiciled in that state or is a statutory resident of that state. A person’s state of domicile is where the person’s primary and permanent home is located; it is the place where they reside after any period of absence like a long vacation or a business trip. The Pennsylvania Department of Revenue has published a list of factors to be considered in determining one's domicile. The list focuses on where an individual has the greatest connections and includes factors such as where the taxpayer owns a residence, spends the greatest time, has active doctors, lawyers and accountants, registers to vote, maintains an active banking accounts, receives mail, records his or her address for insurance policies, attends family and social events, and even where the taxpayer keeps his or her pets. Most states follow these same concepts in determining domicile.
Most people are familiar with the concept of domicile residence, but what about statutory residence? Even if you are not domiciled there, most states take the position that you are a statutory resident of their state for income tax purposes if you spend over 183 days (or over 6 months) and maintained a “place of abode” in the state. States that apply this rule include Colorado, Connecticut, Delaware, Washington DC, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, Virginia, and West Virginia. Other states have similar rules, but for a longer period of days; for example, Hawaii and Oregon consider a person who spent over 200 days in their state to be a statutory resident.
New York has one of the most aggressive residency audit programs in the country, designed to determine whether a taxpayer correctly filed as a resident or part year resident of both New York and New York City. The audits generally cover three years, and focus on determining 1) whether the taxpayer(s) meets the domicile residency test, 2) whether the taxpayer(s) meets the statutory residence test, and 3) whether income was sourced correctly to New York (assuming the taxpayers established non residency based on the first two tests). New York also requires both nonresidents and part year residents to disclose on their tax returns the addresses of any homes maintained in New York and the number of days spent in the state (whether or not you visited your home), which allows them to easily detect potential statutory residents to select for residency audits.
Statutory residency exists in New York if you maintain both a place of abode and are in the state over 183 days. This implies that you stayed in the NY home you maintain for over 183 days, but that is not how the state views it. Whether or not you visited your NY place of abode, the mere fact that it exists and is suitable to use was used by the Court to rule that a taxpayer was a statutory New York resident. Any taxpayer that maintains a place of abode in New York and regularly travels to (and from) New York City for their job could find themselves in a dual residency situation, even if they did not visit the place of abode at any point during the year in question. Residency planning is especially important anytime New York in involved. We suggest consulting a tax advisor to discuss any possible tax exposure and how to mitigate risk.
You are probably wondering what it will cost you if you are considered a dual resident. Most states with an income tax require both their domicile and statutory residents to pay tax on all their income, including investment income, regardless of where the income was earned. In a dual residency situation, this means an individual can be subject to tax on all their income in two states; in other words, their income is double taxed. Most states provide relief for this double taxation by allowing taxpayers to claim a tax credit for taxes paid to other states on income subject to tax in both your domicile state and another state. You are usually required to attach a copy of the other state’s tax return to substantiate the credit. The credit is generally taken in the state of domicile for the tax paid to either nonresident states or a statutory resident state. Although the credit eliminates a portion of the double taxation, it does not eliminate the extra tax burden (rate arbitrage) of the higher tax state because states limit the allowable credit to the tax paid to their state on that income.
Joe is a Pennsylvania resident who enjoys the benefit of the state’s low-income tax rate. His job requires him to travel to New York four days a week. Joe also has a vacation home in the Hamptons he has not visited this year. He travels to work by train and comes home to his family every night. Based on the rules discussed earlier, Joe is a statutory resident of New York, thus he is subject to double taxation. The top tax rate for New York State is 8.82%, which is higher than most other states. Even though Joe paid tax to New York on all his income at a rate of 8.82%, his credit for taxes paid to NY on his Pennsylvania tax return is limited Pennsylvania’s 3.07% tax rate. This example illustrates how taxpayers pay tax based on the rate of the statutory residence state instead of the (potentially) lower rate in their state of domicile.
Ways to Avoid Dual Residency
- Check your state’s guidelines on how many days you need to reside in that state to be considered a resident (e.g., Idaho requires spending over 270 days during the tax year).
- Document each time you’ve spent in your vacation home or any other location in the state you have a place of abode by using a log or keeping travel receipts. That will make it easier to manage your day count and make final residency determinations. If you are getting close to that 183-day mark, try to limit the times you visit the state for the remainder of the year.
- If living in the other state permanently is an option, think about changing your domicile to that state. Remember that to prove you are no longer domiciled in your original state, you will need to change all your personal information, such as mailing address, bank accounts, doctors, etc., to that new state.
While working remotely can afford working in a comfortable location, especially at your vacation home, it can also result in tax implications you may not expect. Residency audits are at an all-time high, so if you feel you could be a possible dual resident, it is important to consult with your tax advisor.