Dual state residency can result in dual taxation (2023)

The global pandemic has taught us that work doesn’t have to be done in an office. When the emergency orders were issued in March and April of 2020, confining most of us to our homes, remote work became the norm rather than the exception. As things progressed, people escaped the cities and urban areas and began working remotely. In today’s world, it has become commonplace to relocate on either a temporary or permanent basis.

Whether it is escaping a global pandemic, for a sought-after change, such as a dream job in another state, a post-retirement move to a warmer climate, or for reasons less opportune — military service, serious illness or divorce — don’t let an unintended impact of relocation be an unanticipated state tax bill. Multiple states will claim to be your state of residence and attempt to tax your income.

(Video) Dual Residency - Avoiding the Double Tax Bite

Increasingly, states are challenging former residents who attempt to change their domicile to another state. Residency audits are on the rise, particularly in states where larger numbers of residents are more likely to spend winters elsewhere.

Although the rules vary among states, generally speaking, most states define a “resident" as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile" to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. Typically, states also impose tax on 100% of a resident’s income from all sources, including portfolio income. Many states have exceptions for military personnel in active service and for individuals receiving medical treatment for an extended period.

During the pandemic, some states issued guidance that relaxed enforcement of their residency rules while executive orders were in effect. As the executive orders expired, the guidance on relaxed enforcement of the residency rules also expired. If employees continued to work remotely and relocated to other states, this could cause dual residency issues for them.

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Individuals who may be caught in the trap of dual residency and dual taxation include:

  • Retirees with a second home in another state
  • Taxpayers who live in one state but have business activities or interests in another state
  • Individuals who have relocated to another state but return after a number of years
  • Individuals who temporarily relocate to another state or overseas for a job assignment
  • Individuals who have severed all ties with a state but fail to establish residency or domicile in another state

Typical factors states may use to determine residency

Often, a major determinant of an individual’s status as a resident for income tax purposes is whether he or she is domiciled or maintains an abode in the state and are “present" in the state for 183 days or more (half of the tax year). California, Massachusetts, New Jersey and New York are particularly aggressive in this respect. There and elsewhere, taxpayers have the burden of proving through documentary evidence which states they spend time in during the year and how long they remain in these states.

Other evidence often considered in evaluating whether there has been a permanent change in domicile includes:

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  • Location of employment
  • Classification of employment as permanent or temporary
  • Location of business relationships and transactions, such as active participation in a profession or trade or substantial investment in or management of a closely held business
  • Serving on the board of directors for a business or charity
  • Living quarters: whether a person’s former living quarters were sold, rented out or retained, and whether he or she leased or purchased real property in his or her new location
  • The amount of time spent in the state versus amount of time spent outside the state (183-day rule)
  • State where the taxpayer is registered to vote
  • The state of issuance of a driver’s license or fishing/hunting permits
  • Location of the school a family’s child attends
  • Memberships in country clubs, social or fraternal organizations

In residency audits, state auditors will review:

  • Credit card statements: where charges are incurred, where the bill is sent and the location of the checking account used to pay the bill
  • Location of bank accounts, investments and other financial transactions such as automated teller machine withdrawals
  • Resident and nonresident fishing/hunting licenses and park admissions
  • Freeway fast-lane pass charges (E-ZPass, SunPass, etc.)
  • Records of airline frequent flyer miles
  • Jurisdiction issuing a driver’s license, vehicle registration, professional license or union membership
  • Homestead tax abatement or credit applications and property tax bills
  • Church attendance and membership
  • Location of doctors, dentists, accountants and attorneys
  • Official mailing address and where mail is received
  • Where an individual is registered to, and actually does, vote

If you live elsewhere but travel on a regular and frequent basis to another state, it is a good idea to maintain a diary or location log that clearly indicates the dates on which you are in a specific state, accompanied by supporting records such as transportation tickets and receipts. Remember that any part of the day spent in a state, other than when traveling through the state, is generally considered a day spent in the state for residency determination purposes.

Note that the allowable level of participation in charities and social organizations varies among states. Some states, like Wisconsin, do not count such participation against taxpayers claiming nonresident status.

(Video) Dual Residency Tax Implications for Expats - Wednesday Webinar

Action steps to take when changing your residence

Changing one’s residence takes planning and is a proactive process. While courts consider taxpayer intent in state residency disputes, they ultimately look to documents and facts to decide where the state of domicile is. Careful documentation is key:

  • Note the date of your change of residence
  • Document in writing the reason for the change in residence which shows basis and intent (i.e., permanent retirement and relocation)
  • Obtain a driver’s license in your new state
  • Register and insure your vehicles in your new state
  • File a resident income tax return in your new state
  • Revoke any homestead claims or election on your home in your former state and file similar documents in your new state of residence
  • Register to vote in your new state
  • Open bank or brokerage accounts in your new state
  • Replace involvement with business, charities and other organizations in your former location with activity in such organizations in your new residence
  • Change the mailing address for all bills, banks, insurance, doctors, etc. to your new state address
  • Keep a calendar of when you are in your former state versus when in your new state or states
  • Retain airplane tickets, credit card statements, hotel records, etc. that will support your calendar
  • Change professional licenses to your new state (if applicable)
  • Establish relationships with new doctors, dentists, accountants, attorneys, etc.

If you have previously filed a tax return in your current state but are changing your residence, it is imperative that you closely observe the formalities of making a change of residence and that you retain all documentation you may need to prove your new residency. State tax law generally holds that you are not deemed to have created a new domicile until you have abandoned your former state of residence. In addition, be sure to keep that documentation until your former state’s statute of limitations permitting them to audit a return runs its course.

Changing domiciles while continuing to be actively involved with a closely held company is especially complicated. It can be done, but only with proper planning. However, a portion of the compensation earned or profits from a "pass-through" entity (e.g., S corporation) will remain taxable by the state or states in which business is conducted or services are rendered by the owner to his or her company.

(Video) What Is Residency? Can I Be A Resident Of More Than One State?

There are many documented cases of states successfully asserting tax claims on former residents’ income. In some instances, this has occurred many years after the individuals moved to another state or took a job overseas and returned to the United States. When changing your residence, be sure you consult with a tax professional so that you understand the benefits (such as lower tax rates) as well as the potential pitfalls. Don’t pay state tax on more than 100% of your income.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact us.

FAQs

Can you have dual residency for tax purposes? ›

It is possible to be resident for tax purposes in more than one country at the same time. This is known as dual residence.

What is a dual resident taxpayer? ›

A dual status individual is one who changes their tax status during the current year: from a nonresident to a resident, or. from a resident to a nonresident.

What determines state residency for tax purposes? ›

Residency Status 101

The state is your “domicile,” the place you envision as your true home and where you intend to return to after any absences. Though domiciled elsewhere, you are nevertheless considered a “statutory resident” under state law, meaning you spent more than half the year in the state.

What is an example of double taxation? ›

Examples of Double Taxation

The United States' tax code places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains.

How can you avoid double taxation? ›

Retain earnings: If the corporation doesn't distribute earnings as dividends to shareholders, earnings are only taxed once, at the corporate rate. Pay salaries instead of dividends: Shareholders who work for the corporation may be paid higher salaries instead of dividends.

What does dual residency mean? ›

Quite simply, you can have dual state residency when you have residency in two states at the same time. Here are the details: Your permanent home, as known as your domicile, is your place of legal residency. An individual can only have one domicile at a time.

Can a person be resident of two countries? ›

Yes, you could apply for permanent residence of more than one country at the same time. It is similar to applying for visas to travel to more than one country. However, after you are granted permanent residence by a country, you may be subject to physical residence requirements of that country.

How do I file a dual-status tax return? ›

Write "Dual-Status Return" across the top of the return. Attach a statement to your return to show the income for the part of the year you are a resident. You can use Form 1040, U.S. Individual Income Tax Return as the statement, but be sure to write "Dual-Status Statement" across the top.

Can I be permanent resident of two countries? ›

Dual Residents

A person can have a home in more than one country, and it's also possible to be considered a resident of two (or even more) countries at the same time. Each country may have different definitions or conditions for residency.

Can I have dual residency in 2 states? ›

Legally, you can have multiple residences in multiple states, but only one domicile. You must be physically in the same state as your domicile most of the year, and able to prove the domicile is your principal residence, “true home” or “place you return to.”

Where do you pay taxes if you live in two states? ›

You would simply pay the tax yourself to the state you live in. In this case, remember that most taxes are “pay as you go” taxes. You may have to make estimated tax payments to your state of residence throughout the year if no employer is withholding them for you.

How do I know which state I am a resident of? ›

All U.S. citizens are residents of at least one state for tax purposes. Your state of residence is determined by:
  1. Where you're registered to vote (or could be legally registered)
  2. Where you lived for most of the year.
  3. Where your mail is delivered.
  4. Which state issued your current driver's license.

What causes double taxation? ›

Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.

What is the problem of double taxation? ›

When the state of residence levies tax on worldwide income, the income from the other state is taxed twice. Thus, full tax liability in a state and limited tax liability in another can lead to double taxation.

What is double taxation and state the importance of it? ›

Double tax avoidance agreement ensures that the honest taxpayers do not end up paying tax in two countries. It also acts as a tool to promote investment from certain countries by offering tax exemptions or lower tax rates. It is an effective way to promote cross country investments without any ambiguity.

Do dual citizens pay US taxes? ›

Yes, if you are a citizen or resident alien of the United States, you have a U.S. tax obligation, even if you're a dual citizen of the U.S. and Canada. The U.S. is one of two countries in the world that taxes based on citizenship, not place of residency.

Do US citizens pay double taxes? ›

As an American citizen, you're required to file a US tax return even if you're living abroad. And if you already owe income tax to a foreign government, you could end up paying twice on the same income.

What is meant by double taxation? ›

Double taxation refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings.

Do I have to pay NY state income tax if I live in another state? ›

You are subject to New York State tax on income you received from New York sources while you were a nonresident and all income you received while you were a New York State resident. You may have to pay income tax as a resident even if you are not considered a resident for other purposes.

Can husband and wife be residents of different states? ›

Many taxpayers are surprised to learn California even allows separate residency status for spouses. But in fact, there is no such thing as “marital” residency.

How do I file taxes if my spouse lives in another state? ›

In some cases, spouses who live in different states can submit their federal tax returns as “married filing jointly” while filing their respective state returns as “married filing separately.” Other times, there may be tax advantages to filing jointly in one state, or the nonresident spouse will be required to file.

What is the best country to get permanent residency? ›

Easiest Countries to Get a Permanent Residency
  • Easiest Countries to Immigrate To.
  • New Zealand.
  • Australia.
  • Spain.
  • Paraguay.
  • Germany.
  • Montenegro.
  • Czech Republic.

Can you have residency in 3 countries? ›

Can you have triple citizenship? Yes, you may hold citizenship in three countries. The same rules apply as for dual citizenship — not every country allows for multiple citizenships, so you would need to check whether your country of origin permits triple citizenship.

Where is the best tax haven country? ›

Top 10 Tax Haven Countries in the World - Tax Justice Network 2021 (CTHI value):
  • Bermuda — 2,508.
  • Netherlands — 2,454.
  • Switzerland — 2,261.
  • Luxembourg — 1,814.
  • Hong Kong — 1,805.
  • Jersey — 1,724.
  • Singapore — 1,714.
  • United Arab Emirates — 1,664.

What is dual-status return? ›

A dual-status taxpayer is a foreign citizen who lives in the U.S. for a substantial part of a year. The dual-status taxpayer is taxed on income from all sources received during residence in the U.S. and only U.S. income received while outside the U.S.

Can a dual-status return be e filed? ›

A dual-status return cannot be e-filed. If you are instead a resident alien at the beginning of the year and a nonresident alien at the end, you will use Form 1040NR as your return and Form 1040 as the statement.

Can dual-status taxpayer claim foreign tax credit? ›

Most tax credits can only be claimed by married nonresident aliens if you and your spouse file resident alien status for the entire year and file jointly. Resident aliens may claim tax credits under the same rules that apply to U.S. citizens, including the following: Foreign Tax Credit.

Which country gives citizenship easily? ›

An Antigua and Barbuda passport offers you visa-free travel in 151 nations across the world. Antigua and Barbuda is one of the easiest countries to get citizenship by investment.

Which country gives passport easily? ›

Dominican Republic

Naturalization is the fastest way to become a citizen after only two years of staying in the nation.

What are the benefits of dual citizenship? ›

What are the advantages of dual citizenship?
  • Freedom to international travel. ...
  • Freedom to work. ...
  • Freedom to own property. ...
  • Quality of Life and Education. ...
  • No more complicated immigration forms. ...
  • Family Sponsorship.

What is the difference between residency and domicile? ›

What's the Difference between Residency and Domicile? Residency is where one chooses to live. Domicile is more permanent and is essentially somebody's home base. Once you move into a home and take steps to establish your domicile in one state, that state becomes your tax home.

What is the 183 day rule for residency? ›

The “183-Day Rule” in Canadian Tax Residency

The 183-day rule refers to people who “sojourn” in Canada for more than 183 days in a year. Where this is the case, they are deemed to be a Canadian resident for tax purposes throughout the whole year.

Does it matter what state you live in when filing taxes? ›

Each state wants its fair share of your income, which means you may owe taxes to multiple states depending on your circumstances. The good news is that living or working in two or more states doesn't affect your federal tax return. However, you'll have to navigate through filing multiple state tax returns.

Can I work in two states? ›

Some states have reciprocity agreements with each other. This means if you live in one state and work in another, and the two states have a reciprocity agreement with each other, then you will only need to file a tax return and pay taxes for the state in which you lived.

How do you change state residency? ›

Here are the six steps you'll need to take to change your state residency.
  1. Check state requirements. ...
  2. Establish domicile. ...
  3. Change your mailing address with USPS. ...
  4. Change your address with utility providers. ...
  5. Register your car and get a new driver's license. ...
  6. Register to vote.
13 Jul 2021

Can you not be a resident of any state? ›

You can have many residences, but only one domicile. You can have at most one tax domicile, but you may not have any. Provided that you do not meet the requirements for tax domicile in the last state in which you reside, then you no longer have tax domicile in any state.

What happens if you don't spend 183 days in any state? ›

You first should learn what your old state's rule is for taxing people. Some states have a bright line rule. If you're in the state for more than 183 days in the calendar year, then you're a full-time resident. Spend fewer than 183 days in the state and you'll only be taxed on income earned in the state.

Can same income be taxed twice? ›

It is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice.

What causes double taxation quizlet? ›

Double taxation applies to corporations because earnings are taxed both at the corporate level and the shareholder level when earnings are distributed in the form of dividends.

Is double taxation good or bad? ›

The current tax system taxes corporate income twice. This double taxation has a pronounced negative economic impact, particularly on wages. It distorts the economy and harms productivity.

Who pays double taxation? ›

It most commonly applies to corporate shareholders and their corporations. The corporation is taxed on its earnings or profits, then the shareholders are taxed again on dividends they receive from those earnings. Corporate shareholders often complain that they're being "double taxed" because of this system.

What is residence principle of taxation? ›

Residence principle of taxation. Principle according to which residents of a country are subject to tax on their worldwide income and non-residents are only subject to tax on domestic-source income.

Is double taxation illegal? ›

“Small-business owners can't afford to pay taxes on the same income in multiple states,” said Harned. “And the U.S. Supreme Court has said that they shouldn't have to because double taxation violates the federal Constitution.” In 2015, the U.S. Supreme Court ruled, in Comptroller of the Treasury of Maryland v.

What is an example of double taxation? ›

Examples of Double Taxation

The United States' tax code places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains.

What are the kinds of double taxation? ›

There are two types of double taxation: jurisdictional double taxation, and economic double taxation. In the first one, when source rule overlaps, tax is imposed by two or more countries as per their domestic laws in respect of the same transaction, income arises or deemed to arise in their respective jurisdictions.

How can you avoid double taxation? ›

Retaining corporate earnings.

You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. If shareholders don't receive dividends, they're not taxed on them, so the profits are only taxed at the corporate rate.

Can I have two permanent residency? ›

The question here is can I have permanent residency in more than one country? Yes. You can.

Can a person have residency in two countries? ›

The individual who travels frequently and works in cross-border locations may sometime face a situation of 'dual tax residency'. Dual tax residency means acquiring tax residency of two countries simultaneously in a particular tax year by satisfying the specified conditions of domestic tax laws of both the countries.

How are dual citizens taxed? ›

For individuals who are dual citizens of the U.S. and another country, the U.S. imposes taxes on its citizens for income earned anywhere in the world. If you are living in your country of dual residence that is not the U.S., you may owe taxes both to the U.S. government and to the country where the income was earned.

Do you have to pay taxes on dual citizenship? ›

Yes, if you are a citizen or resident alien of the United States, you have a U.S. tax obligation, even if you're a dual citizen of the U.S. and Canada. The U.S. is one of two countries in the world that taxes based on citizenship, not place of residency.

What is the hardest country to become a citizen of? ›

17 Hardest Countries To Get Citizenship [REVEALED]
  • Qatar.
  • Vatican City.
  • Liechtenstein.
  • Bhutan.
  • Saudi Arabia.
  • Kuwait.
  • Switzerland.
  • China.

Which country gives passport easily? ›

Dominican Republic

Naturalization is the fastest way to become a citizen after only two years of staying in the nation.

Which country gives residency easily? ›

One of the popular nations on our list for citizenship or residency is none other than New Zealand. The country has a skilled migration program that makes it easier for people to immigrate. However, to move to the destination, criteria such as having an age limit under 55 and work experience are mandatory.

What is the difference between resident and tax resident? ›

Tax residence is a short-term concept and is determined for each tax year in isolation, reflecting where you reside. Domicile is more long-term and refers to where you consider you have your permanent home over the course of your life.

Where is the best tax haven country? ›

Top 10 Tax Haven Countries in the World - Tax Justice Network 2021 (CTHI value):
  • Bermuda — 2,508.
  • Netherlands — 2,454.
  • Switzerland — 2,261.
  • Luxembourg — 1,814.
  • Hong Kong — 1,805.
  • Jersey — 1,724.
  • Singapore — 1,714.
  • United Arab Emirates — 1,664.

Can you have residency in 3 countries? ›

Can I have three citizenships? Yes, it is allowed depending on your original nationality and the other nationalities you will get, you can go beyond dual citizenship and have three or more. Which countries allow triple citizenship? As a rule of thumb, countries that allow dual citizenship also allow triple citizenship.

Why are dual citizens double taxed? ›

Double Taxation

This is a situation in which you owe income taxes in both countries. The U.S. government assesses taxes on American citizens for global income. Therefore, a dual citizen who has earned income abroad you may owe U.S. taxes on that income. Plus, there may be tax in the country where the income was earned.

What is the benefit of being a dual citizen? ›

Improved Personal and Professional Security. With many nations being subject to government intrusion, social unrest, and economic strife, dual citizenship can be the key to life in a country where civil liberties are protected, and socio-economic and political stability has been achieved.

What is the disadvantage of dual citizenship? ›

Double Taxation Liability

One of the major drawbacks of dual citizenship is the responsibility to pay income taxes to both countries. If you are primarily a US citizen, you will have to pay income taxes even if you live in another country as an expat or dual citizen.

Can a U.S. citizen have dual citizenship? ›

Does the United States allow dual citizenship? Yes, practically speaking. The U.S. government does not require naturalized U.S. citizens to relinquish citizenship in their country of origin.

How does IRS know about foreign income? ›

One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.

Why does bank ask about dual citizenship? ›

Many bank compliance officers feel obligated to ask customers about their country of citizenship, particularly in order to collect federally mandated information aimed at assessing potential risks associated with so-called “nonresident alien accounts.”

Videos

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2. International taxation part 28: where are you "resident" under a double taxation treaty?
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5. What is Double Taxation | How to avoid Double Taxation | Capital Gains and Dividend Tax
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