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How to Determine Residency for Tax Purposes

There’s no doubt that remote work has gained momentum over the last few years. Many companies are permanently rethinking their approach to working outside the office as employees express interest in the perks of working from home.

If you have traveled to another state and worked while there, you may owe taxes in the state where you worked, even if you weren’t there for the whole year. States have different residency rules for how long someone must be there before they’re considered a resident for tax purposes.

Another group that should pay attention are those who moved from states with high-income taxes to those with low or zero-income taxes. If you want to move to the lower income tax state for a couple of months just to lower your taxes, that’s probably not going to happen. States want to collect income taxes and will likely not overlook temporary moves. Unless you took steps to change your permanent residence, you will not be able to get away with paying no or less money in state taxes with a temporary move.

If you leave your state of residence, it is important to determine if your presence in a different location is for a temporary or transitory purpose. You should consider the purpose and length of your stay when determining your residency for taxes.

The underlying theory of residency for tax purposes is that you are a resident of the place where you have the closest connections. This means that you should compare your ties to your resident state with your ties elsewhere. It is the strength of your ties, not just the number of ties, that determines your residency.

The following list shows some of the factors you can use to help determine your residency status for taxes:

  • Amount of time you spend in one state versus amount of time you spend in another state.
  • Location of your spouse/RDP and children.
  • Location of your principal residence.
  • State that issued your driver’s license.
  • State where your vehicles are registered.
  • State where you maintain your professional licenses.
  • State where you are registered to vote.
  • Location of the banks where you maintain accounts.
  • The origination points of your financial transactions.
  • Location of your medical professionals and other healthcare providers (doctors, dentists etc.), accountants, and attorneys.
  • Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
  • Location of your real property and investments.
  • Permanence of your work assignments in different states.

Many states follow a “facts and circumstances” test. For example, California takes a very aggressive stance and regularly performs residency audits. The state auditor will review many third-party records to determine if you are a California resident including electric or gas bills, cell phone records, grocery store receipts, debit and credit card charges.

Keep in mind, no one thing makes you a resident, and no one thing makes you a nonresident.

Our tax consultants can help you determine the state of residence for your income taxes. Talk to an advisor at Wouch Maloney for more information.

DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update, and other related communications are intended to provide general information, as of the date of this communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.