Michael lives in New York and Florida. Melissa lives in California and Utah. Whether they are taxed in both states depends on a number of factors. Here’s an overview of the complex concepts that affect multistate taxation.
Which state can tax all of your income?
The state where you’re domiciled generally has the power to tax your worldwide income. Your domicile is the place where you have your “true, fixed, permanent home.” It may also be defined as “the principal establishment to which you intend to return whenever absent.” 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. Courts and taxing authorities look to a number of factors that demonstrate this intent, including:
- How much time do you spend in the state?
- Do you own or rent one or more residences in the state?
- Are you employed in the state?
- Do you conduct business in the state?
- Are your children, grandchildren or other family members in the state?
- Do you keep your prized personal possessions — such as artwork, furniture and heirlooms — in the state?
- Have you obtained a driver’s license and registered your car in the state?
Additional factors have been used to determine intent. Your tax advisor can help you see the full picture in your particular situation.
When else can states tax?
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 would be taxable by the state where you work.
When can multistate taxation occur?
There are several ways in which the same income can become taxable by more than one state. Suppose, for example, that you’re domiciled in state A but commute regularly to state B for business. Assume that the residency threshold in state B is 183 days. If you spend more than 183 days in state B and maintain a permanent place of abode there, state B may tax you as a resident, while state A taxes you 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, your income would be taxable in both states.
Custom-made tax strategies
There are other scenarios that could expose you to double taxation. Again, consult your tax advisor to learn about your tax liabilities and possible tax strategies for your particular situation.