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Tax Implications of Working Temporarily in Another State

Working from home or sheltering in place during the COVID-19 pandemic has brought with it many changes, including taxing ones. In some cases, people may be working outside of their work or home state, and may as a result have tax obligations in multiple states when it comes time to file their returns. For example, a client of ours is a N.J. resident but has been working at his vacation home in Cape Cod, Massachusetts. Will he be subject to Massachusetts tax? Another client of ours is now a non-commuting commuter, who lives in N.J. and normally commutes to New York. Will she still owe tax to New York? The answers are quite fuzzy and in short, it depends.

The main factor in determining if you have a tax obligation to a state is how much time you’ve spent there during the year. One test that states apply to determine statutory residency is if you have spent at least half a year (183 days) in that state and maintain a permanent place of abode, then you will be taxed as a resident of that state. Another test, a test of domicile, is based on factors such as your true home base, the location of your business, the amount of time you spend in that state, the location of your cherished possessions and where your family resides. In most cases, people don’t intend to permanently move to a different state, but may end up spending more than half a year in a different state. This situation will create many complex challenges as two states may claim they’re entitled to their share of taxes.

In summary, if you spent significant time working in a state other than your state of domicile, you will most likely be expected to pay income taxes in both states. Taxpayers should make note of where they’ve been during the year and for how long in order to simplify things when the time comes to file. In the majority of states, the state will credit non-resident tax owed to different states against the income tax owed to your home state to avoid dual taxation (although tax credits may not be available for certain types of income such as interest, dividends, etc. in certain states). Furthermore, there are 15 different “reciprocity” agreements where neighboring states note that if a taxpayer works in one state and lives in the other, they will just owe resident income taxes. Despite the lack of definitive information, taxpayers should be aware that if they are working across state lines, it may result in taxing issues. Thinking ahead can spare you some of the headaches next tax season.