The global pandemic has taught us that work doesn’t have to be done in an office. When the emergency orders were issued in March and April of 2020, confining most of us to our homes, remote work became the norm rather than the exception. As things progressed, people escaped the cities and urban areas and began working remotely. In today’s world, it has become commonplace to relocate on either a temporary or permanent basis.
Whether it is escaping a global pandemic, for a sought-after change, such as a dream job in another state, a post-retirement move to a warmer climate, or for reasons less opportune — military service, serious illness or divorce — don’t let an unintended impact of relocation be an unanticipated state tax bill. Multiple states will claim to be your state of residence and attempt to tax your income.
Increasingly, states are challenging former residents who attempt to change their domicile to another state. Residency audits are on the rise, particularly in states where larger numbers of residents are more likely to spend winters elsewhere.
Although the rules vary among states, generally speaking, most states define a “resident" as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile" to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. Typically, states also impose tax on 100% of a resident’s income from all sources, including portfolio income. Many states have exceptions for military personnel in active service and for individuals receiving medical treatment for an extended period.
During the pandemic, some states issued guidance that relaxed enforcement of their residency rules while executive orders were in effect. As the executive orders expired, the guidance on relaxed enforcement of the residency rules also expired. If employees continued to work remotely and relocated to other states, this could cause dual residency issues for them.
Individuals who may be caught in the trap of dual residency and dual taxation include:
- Retirees with a second home in another state
- Taxpayers who live in one state but have business activities or interests in another state
