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Two homes in different states may result in multistate taxation

Multistate taxation laws are complex and vary from state to state. But, in a nutshell, if a person is domiciled in a state, that state has the power to tax his or her worldwide income. This article explains the multistate taxation laws and uses a fictional example to help understand them.

Because Kyle often travels between two states for work, he decided to buy a condo on the East Coast in addition to his house on the West Coast. What Kyle didn’t take into consideration was the double taxation of his income that resulted from his real estate purchases.

 

Domicile matters
Multistate taxation laws are complex and vary from state to state. But, in a nutshell, if you’re domiciled in a state, that state has the power to tax your worldwide income. Your domicile is the place where you have your “true, fixed, permanent home.”

Once you establish domicile in a state, it remains there until you establish domicile in another state. The key to determining your domicile isn’t how much time you spend in a place, but rather your intent to remain there indefinitely or to return there.

States also have the power to tax the worldwide income of statutory residents. You can have only one domicile, but it’s possible to be a resident of two or more states. Typically, you’re a resident of a state if you maintain a “permanent place of abode” and you spend a minimum amount of time there during the year (such as “more than 183 days” or “more than six months”).

Also, states have the power to tax income derived from a source within the state, even if you’re not a domiciliary or resident. For example, if you commute across the border for a job in another state, your wages are taxable by the state where you work.

An example
There are several ways in which the same income can become taxable by more than one state. Let’s take a closer look at Kyle’s situation. He is domiciled in state A but commutes regularly to state B for business. Assume that the residency threshold in state B is 183 days. If he spends more than 183 days in state B and maintains a permanent place of abode there, state B may tax him as a resident, while state A taxes him as a domiciliary. And keep in mind that partial days are often included as full days. One possible way to avoid this result is to not own or rent an apartment or house (even a vacation home) in state B.

Many states offer credits for taxes paid to other states. For example, suppose state A allows residents domiciled in other states to claim a credit for taxes paid to those states, but only if those states offer a reciprocal credit to their residents domiciled in state A. In the above example, if state B doesn’t allow such a credit, Kyle’s income is taxable in both states.

Meet with your Moore Colson tax advisor
If you are currently splitting your time between two or more states, it’s critical to discuss your situation with a Moore Colson tax advisor.

 

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