Dear Kirk: For individuals that split time between more than one state, how do you determine residency and the associated state/local tax implications?
Kirk Says: Every state has different requirements as it relates to residency and the need to file a state return for tax purposes. To properly determine how you should file, you should visit the government websites for the states in question.
Take note that there are nine states that do not have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
With that said, let’s look at some of the common stances states are taking on the matter. When determining residency, you should start by taking a look at these indicators: where you are registered to vote, where your vehicles are registered, which state issued your driver’s license and where your kids go to school. However, some states simply look at how many days you were a resident in the state during the year.
Certain types of income will require filing a return in the state in which the income was earned, regardless of your physical location. Some examples: partnership in an out-of-state company, owning rental property in another state, or being a S-corp shareholder where the corporation does most of its business in another state. You will be required to calculate an apportionment schedule for the states to determine the amount you may owe in a given state, but there will be tax credit allowed in your resident state.
My recommendation here is that if this is a one-off situation where perhaps you are working on a short-term project that requires you to jump back and forth between states for a few weeks at a time, it may be worth it to get advice from a tax accountant in your resident state to determine how to handle your taxes for that given year.
However, if this is a situation that will be the norm for the foreseeable future, spend time consulting with an accountant to gain understanding of how the calculations are made so that you can handle it yourself in years to come. The peace of mind—and saving on any possible tax penalties—will be well worth the cost of the advice.
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.