Consider Taxes When Moving to a New State

These days, many jobs are being performed remotely. With greater flexibility to work from anywhere, some people are considering moving further away from their jobs, even to a new state. This article explains that relocating to another state can create income tax complications. So before you call the moving van, familiarize yourself with the potential tax issues you may face.

The Long Arm of Tax Law

To get a feel for your potential tax exposure when moving to a new state, you need to understand the concepts of domicile and residency. Domicile is generally defined as the place where you have your "true, fixed, permanent home" or the "principal establishment to which you intend to return whenever absent."

You can have only one domicile at a time. Once you establish domicile in one state, it stays there until you establish domicile in another state. It's important to recognize that domicile, in many respects, is a state of mind. Even if you spend more time in another state, your domicile won't change if it remains the place you intend to stay indefinitely and return to when you're away.

Statutory residency, on the other hand, has more to do with where you spend your time. Residency laws vary from state to state, but typically you're considered a resident if you maintain a "permanent place of abode" in a state and spend most of your time there. Again, the law varies from state to state, but a common threshold is 183 days or more.

Generally, states have the power to tax three types of income:

  1. Worldwide income of persons domiciled in the state,
  2. Worldwide income of persons who are statutory residents of the state, and
  3. Income derived from sources within the state, regardless of the location of the recipient's domicile or residence.

State-sourced income typically includes income from real property or tangible property located in the state, income from certain business interests in the state, or income from services performed in the state. For example, even if your domicile and residence is in State A, if you commute across the border for a job in State B, then your wages could be taxable by State B (as well as State A).

Avoid Double Taxation

Moving to a new state can trigger double taxation. Let's say you live and work exclusively in State A, which is both your domicile and residence. Your employer allows you to work remotely on a permanent basis, so you decide to relocate to State B. Because you now spend most of the year in State B, it has become your statutory residence and your income is taxable there. However, because you retain significant ties with State A, it considers you to be domiciled there and also taxes your income.

To provide relief from double taxation, some states have reciprocal arrangements with other states under which they agree not to tax each other's residents. Even if reciprocity doesn't apply, states generally provide credits for taxes paid to other states. However, these credits may not completely offset the tax you're paying to the nonresident state. For example, if you live in a state with no income tax but work in a state that has an income tax, the result will be that, at least for that income, you'll pay tax at the rate assessed by the nonresident state.

If you're moving to a state with a lower income tax or no income tax, the most effective way to minimize your tax costs is to shift both your residence and your domicile to the new state. That means spending the majority of your time in the new state and taking steps to establish your domicile there. (See "How to change your domicile" below.)

Watch Out for "Convenience of the Employer" Rules

Generally speaking, an employee who works remotely from another state isn't subject to tax in the state where the employer is located, so long as the worker isn't a resident or domiciliary of that state. However, a handful of states have adopted "convenience of the employer" rules.

These rules allow a state to tax income earned by remote workers outside the state from in-state employers, if they're working remotely for their own convenience and not because it's required by the employer.

Be Prepared

State tax rules are complex, so plan carefully before you relocate to another state. And keep in mind that some states temporarily changed their tax treatment of remote workers during the COVID-19 pandemic. Also, if you're thinking about moving abroad, be sure to consult with your tax advisor because the tax consequences can be even more complicated.

How to Change Your Domicile

Domicile is based on your intent to stay in a state indefinitely and return to it when you're away. Keep in mind that intent can be very subjective, as it's determined largely by the facts and circumstances. There's no magic formula for establishing domicile in a new state, but there are steps you can take to demonstrate your intent. Here are a few actions to take in the new state:

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