The COVID-19 pandemic has drastically changed how businesses operate in the United States. During the past year, many companies were required to shift to teleworking to prevent the transmission of COVID-19. Teleworking involves most employees working remotely from home. Despite restrictions being lifted, many employees continue to work remotely and are unsure when they will return to the office. As a result, there has been a shift in where employees are working and residing. Many Americans have arranged temporary homes outside of the state where their employer is located.
This major shift in living arrangements has income tax consequences such as dual residency, creating double taxation.
Domiciliary and statutory residency
The status of an individual’s state residency and whether they are considered a resident or non-resident can significantly affect taxpayers. Residents are generally taxed on all their income, while non-residents are taxed only on state-source income. Domicile and statutory residency are two ways an individual can be considered a resident for state personal income tax purposes. In general, domicile is the state where a person’s permanent home is located and to which a person intends to return. One’s domicile is determined based on multiple pieces of evidence. The most common factors include an individual’s voter registration state, the issuing state of a driver’s license, the state in which government mail is received, and the amount of time spent in a state. Documentation to prove a change in domicile includes:
- Buying a home.
- Obtaining a new driver’s license.
- Registering a vehicle.
- Registering to vote and visiting medical professionals in the new state.
A statutory residence is when an individual maintains a home in the state and spends more than 182, 183, or 184 days (depending on the state) in that state. To avoid paying taxes in the state, a taxpayer must prove that they have or have not resided in the state more than the specified number of days.
When you are a resident of a certain state, that state has the right to tax all your income, regardless of where it was earned. Having domicile residency in one state and statutory residency in another will result in dual taxation. A resident of two states will likely end up paying more in state taxes than if they were a resident of just one, or a resident of one state and a non-resident of another. Many states allow an individual tax credit for taxes paid to other jurisdictions, but the extent of the credit varies depending on the state. Generally, the state of domicile allows an income tax credit for taxes paid to other states for income that is also taxable in the domicile state. Statutory residencies treat credits for income tax paid to the domicile state differently, depending on the state. Most states also have exemptions for students who attend college out-of-state, as well as members of the military and their spouses who often must move from one state to another.
As a result of the COVID-19 pandemic, many taxpayers find themselves in a dual taxation situation. While teleworking from home, they may have relocated to a vacation or family home away from their domicile state. Some state tax authorities have issued guidance on this situation, but others have yet to do so. Taxpayers and their advisors should plan ahead and prepare to address dual taxation on 2021 tax returns.
If you have relocated temporarily as a result of the pandemic, or have questions regarding dual taxation, please contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.