When you dream of escaping the snow of Boston or Chicago by spending winters in Palm Beach or Palm Springs, you're probably not thinking about the blizzard of tax forms — and potential bills — you could be facing come April. But people who divide their time between two states need to be aware of a few twists in the tax code that could make for an expensive headache if ignored or handled improperly.
Where You Legally Reside
For snowbirds, the priority is usually to establish residency in a state like Florida, which doesn't charge residents income tax, rather than a high-tax state like New York or California. But this means fulfilling a few requirements. Although states have different rules and tax rates, the rule of thumb is that if you spend more than 183 days in the state, you're a resident.
"People get tripped up all the time on the 183 day rule," says Jeffrey Cohen, CPA and tax partner at Grassi & Co. "You’re either a resident or you’re not, and a lot of people don’t understand what the rules are and make bad assumptions."
Cohen says this doesn't include time spent in-state for medical purposes. So if you need surgery and have to check into a New York hospital, the "time meter" isn't running. But, he adds, states are strict about how they do the math. Check the rules in your snowbound state.
For instance, if you spend October to April in another state, but come back to spend three weeks in New York around the holidays, you'll probably pass that 183-day mark and be considered a resident. This means being subject to New York taxes on any income you earned throughout the year, regardless of where you were when you earned it. Nonresidents, on the other hand, are only assessed income tax on what they earned while in the state, a potentially big difference.
Unfortunately, even if you clear the 183-day threshold, you might still be considered a resident of a high-tax state, because tax officials count other factors too — a lot of them. Minnesota, for instance, has a list of more than two dozen factors that help determine if you're a resident.
Again, particular states' tax codes vary, but experts like Cohen say the government will look at things like where you have the bigger home (a sprawling suburban Colonial with five bedrooms and a two-car garage in New York versus a one-bedroom condo in Florida with a galley kitchen and a single assigned parking space is going to point towards "New York resident"), where your cars are registered, where your bank accounts and other financial assets are based, even where you worship or where you're registered to vote — all those kinds of details can go into the mix.
Where You Earn Income
If you live and work for one or more employers in two different states, knowing what you earned when is important for tax purposes."If they’re earning income in two different states, their income may be taxed in the other state as well,"says Lisa Greene-Lewis, a CPA at TurboTax. You can get a credit so that you’re not double taxed, she says, but there's a good chance this might require filing a partial-year return or two state returns. Since it depends on the particular states where you reside, you might want to consult tax software or an accountant to sort it out. Unreported income can lead to serious repercussions, and states aren't going to ask questions if you mistakenly overpay your taxes.
Don't ignore any 1099s, especially if you rent out your winter home on a site like Airbnb when you're not around. You're not the only one getting them. "When they issue that to you, they also issue one to the IRS," Greene-Lewis says. If you rent your home for more than 14 days during the year, you have to report that money as rental income.
The same goes for 1099-K forms. These are issued to merchants who receive payments processed through third-party networks (think Square or Paypal), and you might be surprised who the IRS puts in that category. For instance, do you ferry vacationers to and from the airport as an Uber driver during the winter? If you run up more than 200 trips or $20,000 in fares, surprise, you're classified a merchant for tax purposes. Depending on the details, this could be a factor in determining your state of residency, which could hurt you if you winter in a high-tax state like California.
How Many Homes You Own
If you own two homes, you can deduct mortgage interest from both your primary and secondary residences — but there is an overall cap of $1 million on deductible mortgage debt, and $100,000 cap on what the IRS calls "home equity indebtedness." While this obviously won't apply to everybody, Cohen says people can get tripped up when they don't keep track of the total. "A lot of times people deduct too much mortgage interest and the IRS looks at that," he says.
Things are different if you rent your home for more than two weeks over the course of the year. For tax purposes, this makes you a landlord — a part-time one, anyway — and that has tax implications. "The good news is you can deduct expenses," Greene-Lewis says, even though you'll have to report the rental income. "On a rental, you can get deductions for maintenance and repairs, whereas on your personal residence you can't deduct those things." You can also claim up to $25,000 in losses, she says. How much you can deduct in expenses and in mortgage interest depends on what percentage of the time you live in the home versus renting it out. Run the numbers and figure out which way you come out ahead if you're considering renting out your winter home — and yes, as noted above, this includes listing it on a "sharing economy" site like Airbnb.