Due to the COVID-19 pandemic, individuals may be teleworking in taxing jurisdictions that differ from the employer’s jurisdiction. Additionally, some individuals have multiple places of abode (e.g., homes, condos, apartments, etc.) that they live in for various parts of the year. Because of the pandemic, these individuals may have changed their living patterns for the 2020 tax year compared to previous tax years.
The following is a general discussion that highlights potential residency issues resulting from teleworking individuals or individuals with multiple places of abode. This issue is not only a multistate residency issue, as it can also arise within a single state if an individual has multiple abodes located in different localities of the same state.
Potential Residency Issues
1) Most states define residency as the place where the individual has an established “domicile.” Many states also include a bright-line statutory test in their definition of “resident” that considers an individual to be a resident if the individual is in the state for a certain number of days (normally 183 days or more), regardless of where the individual is domiciled. As a result, it is possible for an individual to be considered a resident in more than one state.
2) Individuals file a resident return in the state where they are considered a “resident.” Typically, individuals are taxed on 100% of their income in the resident state. Conversely, non-residents or part-year residents are only taxed on the portion of their income earned in the non-resident state or income earned while they are a part-year resident. On the resident return, typically the individual is allowed a credit for state income taxes paid to another state as a non-resident. However, if the individual files as a resident of more than one state, then the individual may not qualify to claim a non-resident tax credit for taxes paid to each resident state.
Scenarios to Consider
Below are some examples that may create dual residency issues as a result of COVID-19:
- Individual attempted to change their state domicile before (or during) the COVID-19 pandemic.
- In the beginning of 2020, an individual purchased a new home in another state, and they were in process of moving to the new home in order to change their domicile to the new state. However, due to circumstances of Covid-19, the individual was unable to factually establish a new domicile in the new state. However, they have lived in the new state for over 6 months.
- Individual living in a jurisdiction different from where they are domiciled.
- An individual is domiciled in a state. Due to the COVID-19 pandemic, the individual decided to temporarily move to a jurisdiction where they own a second home for the duration of the pandemic. The individual has not factually changed domicile to the location of the second home but has lived at the second home for over six months.
In addition to the two scenarios discussed above, other various teleworking or married-filing-jointly fact patterns could present multi-state residency tax issues.
To date, some states have issued guidance regarding these potential residency issues, and some have not.
Therefore, for an individual that owns multiple homes, that is living in more than one jurisdiction for various parts of the year, or that is teleworking in a different jurisdiction than where the individual typically works, then a factual analysis should be completed to determine where the individual is considered a “resident,” a “domiciliary,” which type of return (i.e., resident, non-resident, or part-year resident) the individual should file in each state, and whether the individual qualifies for another state tax credit.