With return-to-office plans getting pushed back repeatedly, it’s likely that remote work will be common, if not ubiquitous, for the foreseeable future. This has created an unexpected migration — which portends looming tax headaches for people who don’t plan out a strategy in advance.
While the “snowbird” lifestyle has typically been thought of as the purview of older adults, the shift to working from home for many knowledge workers means that they can live in whatever place — or places — they choose.
Real estate agents report an increasing number of young professionals flocking to onetime retiree havens like Florida to escape Northern winters. Pre-retirees can also benefit from this trend, if the new flexibility allows them to test out possible retirement destinations ahead of schedule. Meanwhile, some people are taking the digital nomad approach and eschewing a home base altogether.
For people who are still in the workforce while residing in two (or more) states, there are some important tax implications. Accountants and tax pros say that careful planning can help mitigate unexpected state income tax obligations. Here’s what you need to know.
How we got here (spoiler: online shopping)
The tug-of-war states are waging for your tax dollars was exacerbated by the pandemic, but the foundation was laid in 2018 with a pivotal Supreme Court ruling CPAs refer to as the “Wayfair ruling.” That decision said states can require ecommerce businesses that sell goods to residents to collect sales tax on those purchases — even if the business doesn’t have a brick-and-mortar location in the state.
“Suddenly your physical nexus was as important as your economic nexus,” says Robert Conzo, CEO at investment advisory firm The Wealth Alliance. “From a sales tax perspective, it became a very big ruling, [and] states jumped on the bandwagon and said, from an income tax perspective, we should look into this.”
Enter COVID-19. Tax revenues initially plunged, prompting states to get more aggressive about claiming income tax. “Budgetary constraints added much more scrutiny on nonresidents or people who claim to be nonresidents. High income tax states like California and New York make it very, very difficult” to escape a tax bill, Conzo cautions.
Establish a primary residence for income tax purposes
People might be turning into social media stars thanks to photogenic feeds that depict an itinerant lifestyle, but tax collectors have no use for “Not All Who Wander Are Lost” bumper stickers. In other words, you have to pick a specific state to establish statutory residence, regardless of how many different states you stay in over the course of the year.
“It's a massively complex issue. It was hard enough to deal with a change in residency when people were retiring,” says Joe Roberts, CPA and head of wealth advisory services at Rockefeller Capital Management.
Typically, the “183-day rule” is the starting point for determining where a person toggling between homes in different states should pay state income taxes. If you spent more than half the year in a state, the reasoning went, that was the state where you should claim residence and to which you should pay taxes.
Keep an eye on your calendar: Roberts says he sometimes has to alert clients to keep track of how many days in a year they live in a particular state. “You can become a statutory resident of a state if you’re there for more than six months,” he says — even if you don’t intend to. (Millennials: This is why your grandparents spent six-months and a day in income-tax-free Florida.)
In recent years, state tax departments have taken aim at loopholes people use to claim residency in a lower-tax state improperly, honing the criteria of what it means to be a “resident” beyond that time-spent threshold.
These alternate measures are especially pertinent now that there are an increasing number of young professionals jettisoning the idea of, “Home, Sweet Home” entirely, renting Airbnbs for a few months at a clip and never hitting the 183-day tipping point in any one state.
There is no definitive yardstick for determining residency in these cases, so auditors look at a handful of factors, such as where people register their vehicles, bank, vote, go to school and worship. Someone with a studio apartment in Florida and a 3,000-square-foot house in New York would have difficulty claiming Florida as their “real” home.
Tim Steffen, director of tax planning for Baird, calls it the “teddy bear” test: Generally speaking, auditors will say the state where you keep your prized possessions is your state of residence. For example, Steffen says, “Where are your family photos, or art? Or your pets?”
Don't forget other states where you earned income
Regardless of residency, you’ll owe taxes in any state where you do work. Pro athletes, for instance, owe taxes to states where games are played — even if they go from plane to bus to stadium and back again.
More relatable, most people who commute across state lines have always had to file state tax returns both in the state where they live and in the state where they work — one resident return and one nonresident return. Some states have reciprocal agreements with neighboring states so employees can avoid some hassle.
TaxSlayer has a list of states with reciprocal agreements, as well as links to the forms you need. It’s worth noting that these agreements have historically been between neighboring states — so if you’re one of the many people who now split your time between states that are a considerable distance away, you can expect to have to file both resident and nonresident state returns.
In addition, not every state extends reciprocity to neighboring states. For example, many workers commute over state lines to jobs in Massachusetts or New York, but these states have no reciprocal agreements with other states. People are required to file two separate state tax returns if, for instance, they live in New Jersey and work in Manhattan.
However, that does not mean residents are paying double taxes. If you have to file in two (or more) states, you can claim a credit against the taxes you paid to the state or states where you work but do not live on the return for the state in which you have residency.
For instance, if you live in New Jersey but work for an employer in New York and pay, say, $500 in state tax to New York, you’ll be able to enter that $500 as a credit against the tax you owe New Jersey.
What if you live and work in one state, but your employer is based in another?
Work from home is where things can get really tricky, and where COVID-19 added an additional layer of complication — not to mention legal challenges.
“The general rule is income is taxable in the state where you perform the services,” Steffen says. “If you're working from home, you’re going to be taxed in your home state — unless the state where you used to work wants to get aggressive with you.”
One especially high-profile fight took place between Massachusetts and New Hampshire. (New Hampshire is one of the nine states that charges no state income tax.)
Shortly after the pandemic triggered an abrupt transition to remote work, Massachusetts passed an emergency order declaring that it could collect tax on income earned by New Hampshire residents between March 2020 and June 2021 if they previously commuted to Massachusetts. In its argument, Massachusetts referenced the Wayfair example to bolster its claim.
New Hampshire declared the order unconstitutional and sued, only to be shot down by the Supreme Court in June 2021, which declined to hear the case. The upshot: New Hampshire residents who used to work in Massachusetts had to pay that state’s 5% income tax, even if they had been working from home during the pandemic.
As the economy eases back towards something that resembles normalcy, remote workers will want to keep new developments on their radar. Unfortunately for people with more than one “home base,” some of the interstate skirmishes on this issue are still being fought in court.
“We're living in a world where there's a little less guidance than we probably hoped for,” Roberts says.
A lot of tax prep software can handle multiple returns, but if your situation is especially tricky consider hiring a professional. Familiarizing yourself with the specifics laid out by your respective states’ departments of taxation. Some states are known for being quite aggressive when they conduct an audit, going so far as to demand cell phone records so they can see where the towers connecting a person’s calls on a regular basis are located.
“This stuff is incredibly state-specific,” Conzo says. “You need a tax pro that knows the various states.”