Understanding Residency Rules and Requirements for Tax Purposes

Most US states have a threshold for the number of days you are allowed to stay within their state without paying residency taxes.

Owning property in multiple states and traveling from one state to another for business or leisure purposes can impact your tax liability in each state. Most US states have a threshold for the number of days you are allowed to stay within their state without paying taxes. If you conduct business as a resident of a state different from your home state residence, there may be tax conditions and benefits.

For example, some of those advantages and considerations may include lower tax rates, recognizing a resident of the new state, and relinquishing tax obligations. In this review of residency rules and requirements, you should get an understanding of domicile and residency issues and the necessary tax conditions. But first, you must know the meaning of domicile before discussing the implications and considerations for tax purposes.

What Is Domicile?

A domicile is a permanent home in which you live indefinitely or for some time with no intentions to move later. Without the essential intention to remain in the home, you can not change domicile until you move. Generally, the IRS treats you as a resident of a domicile state concerning the tax year under the following conditions:

  • You lived within the state as your primary resident consecutively for 135 days and at least 30 days in the taxable year; or
  • If you are a US citizen or resident who is not residing in any state regarding the taxable year, your domicile is the residence after living there for at least 30 days.

Why Considering Residency Taxes Is Important

A new job or the ability to work remotely has encouraged many professionals to either change states or spend more time traveling between states while working. Since the beginning of the Covid-19 pandemic in 2020, statistics showed that nearly nine million individuals moved their residency to another state, while another group was more able to frequently move between states according to personal preference. The issue with traveling between states for business or leisure comes in when people aren’t cognisant of the tax thresholds, and overstaying in another state can have tax implications. Whether you relocate to another state to work or live for reduced tax liabilities, you must research the residency tax rules. Each state has its tax code for changing residents and domicile, which may apply to the new state and your former state.

Residency taxes

Major Tax Implications of Changing your Residency

In most states, you must file a tax return in both jurisdictions for the year in which you moved when establishing a new domicile. It could result in dual residency issues, especially for retirees and those individuals who live in one state and have a business or another home in another state. These requirements are for income, including your wages, self-employment, or earnings from real property in the state. Research how each state classifies earned income for taxpayers to ensure you complete the appropriate tax forms.

Some states may recognize you as a full-year resident if you lived in the state for 183 days or longer, while others may have different thresholds. If you recently moved to another state, it is important to keep a detailed and accurate log of how many days you spend in each state and seek advice from a multistate tax expert. Residents who moved to Texas, Tennessee, and Florida at the beginning of 2022 may not be subject to a personal income tax. In other states, you may need to report your income from all sources as a full-year resident, which will decrease your tax obligations, depending on the time you lived there.

Factors That Determine Residency Tax Status

While the residency tax requirements may differ from state to state, there are a number of factors that each state will use to determine your residency tax liability. Residency is primarily determined by examining all the circumstances of your particular situation. Some of the common considerations would include thinking about:

  • Whether you are legally considered a resident of a particular state
  • Whether your income is taxable within a particular state
  • Which form to file if you are in fact required to file residency taxes within a particular state

These are some of the factors that any given state may look at:

  • Amount of time you spend in each state
  • Location of your spouse and children.
  • 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 point 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 estate property and investments.
Individuals filing residency taxes need to gather the following information as they prepare for residency tax filing:
  • A record of all W-2s or foreign wage statements,
  • A memo showing duty days within a state – this could be an itinerary of scheduled working dates within a state,
  • An accurate log showing the actual number of days spent within the given state from your residency tracking software,
  • Confirmation of your state residency if applicable.

Residency taxes, multistate tax filing and accurately filing your business taxes, can be complicated tasks to perform and track, especially when traveling across states regularly. Residency tracking software can help you manage your days within various states so that you can keep track of taxable days per state. It is highly advisable to partner with an expert to help you manage your taxes if any of the above apply to you. An expert can help save you penalties from trying to tackle the process by yourself and doing it incorrectly.

Fusion CPA has helped small business entrepreneurs, contractors, and the self-employed understand their tax liabilities, and our certified public accountants have extensive experience in residency rules and taxation. Schedule a discovery call to meet with us.

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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