If you work remotely in another state or are thinking about changing your residence from one state to another, you may be caught in the middle of a major state tax audit. If you keep a home in your original state or you later decide to return, you could have even more tax problems. State tax authorities may argue you never really left, and that you owe them a big tax bill for all the income you earned while away. Here are tips to ensure this does not happen to you.
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 Seeyoulater 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 often 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 period of time, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, you will have problems.
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 have to be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:
The last thing you want is a call 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.
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Mia Verc, CPA; Janice Papais, CPA
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