Did Your COVID-19 Relocation Just Make You a Resident Of a New State?
As the country continues to deal with the COVID-19 pandemic, the intricacies of state tax law are probably furthest from most peoples’ minds—but it’s these intricacies that could potentially cause a significant and unexpected tax burden. When stay-at-home orders were first issued back in March, many individuals chose to quarantine somewhere other than their primary residence. According to a survey conducted by the AICPA, half of those people are unaware of the tax implications associated with that choice. If you’re one of those people, then there are two important tax issues to consider: telecommuting and dual residency.
Most people live and work in the same state, so your employer will withhold taxes for that state; if you live in a different state than where you work, it becomes a bit more complicated. Most states source income to the state where the work is performed. For example: If you live in New Hampshire but commute to a job in Massachusetts, your wages will be considered Massachusetts source income. If you work from home full time in New Hampshire, your wages will be sourced to New Hampshire. New York, on the other hand, applies a “Convenience of the Employer” rule.
New York will tax all wages of a non-resident working from home that are associated with a New York-based employer if the employee works just one day in New York, unless the employer required the employee to work out of New York for the employer’s convenience. It’s unclear if working from home due to the COVID-19 pandemic is for the “convenience of the employer” and New York has not provided guidance to date.
Many states are taking a similar approach to New York during the pandemic in an attempt to raise additional revenue. Massachusetts issued new regulations effective for March 10 to December 31, 2020, which sources all income earned from a Massachusetts employer to Massachusetts if the employee performed services in Massachusetts immediately prior to the COVID-19 pandemic and began performing services from outside of Massachusetts because of the pandemic. New Hampshire, which does not have an income tax, has filed suit against Massachusetts challenging the constitutionality of these regulations. New Jersey is also considering legal action against New York to avoid issues of double taxation.
Dual Residency and Double Taxation
In general, you avoid double taxation on income because states allow a credit against your resident state income tax for income tax paid to a non-resident state. The added complication this year for individuals is that they may be taxed by multiple states as “tax residents;” the state where they are domiciled and the state where they are a statutory resident. Under normal circumstances, a taxpayer is considered a resident of the state where they are “domiciled,” which is defined as the state where they have a permanent home, and where they intend to return to after an absence. If they had earned income in another state, they would typically receive a credit on their resident state return for taxes paid to the non-resident state. However, a taxpayer can also be considered a “statutory resident” of a state if they meet certain criteria, but these criteria vary from state to state. In Massachusetts, for example, you’re a statutory resident if you maintain a permanent residence and have been in the state for more than 183 days; it doesn’t matter if you don’t own the property. If you’re domiciled in Connecticut but relocated to Massachusetts in March to quarantine, you could potentially be considered a tax resident in both states and would be taxed as such. While most states allow a credit for taxes paid on income sourced to another state, unsourced income such as investment interest and dividends could potentially be subject to tax in both states. New York, in particular, is very limited in the credit it provides on unsourced income.
If you’ve been living in a different state than your permanent home due to the pandemic and are unsure of your tax liabilities, please reach out to your team at Wolf.