TRUST & ESTATE PLANNING

Answering the Tax Question, Where Did You Live in 2020?

02.25.2021 - Craig Richards, Head of Tax Services

A new tax season officially kicked off on February 12 when the IRS began accepting and processing federal tax returns for 2020. Most years around this time, taxpayers simply need to start gathering tax-related documents and sending them off to their accountants.

But 2020 was not a normal year. In response to the COVID-19 pandemic, many people spent a considerable amount of time outside their home states, which adds a wrinkle to this year’s tax process: Figuring out where they need to file state tax returns.

How to Identify Your Home State

If you hunkered down at home in 2020, you probably don’t have much more to think about than you usually do. But if you are one of the millions who spent time in a different state—maybe at a vacation home, with relatives or somewhere the weather was better—you may have some serious thinking to do before filing your tax returns. Most importantly, you need to know how many days you spent outside the boundaries of your home state last year.

Of course, most taxpayers only need to file a state tax return if their home state imposes an individual income tax. The rules are typically straightforward. You can only be “domiciled” in one state. To determine where you are a resident, most states look primarily at multiple questions regarding your home, active business involvement, an analysis of where you spend your time, the location of “near and dear” items and your family connections. 

Secondary factors states look at to determine your residency for tax purposes include things like where your financial statements and bills are sent, the location of your safe deposit box, which state issued your driver’s license, where your vehicle is registered and where you are registered to vote.

Other Triggers for State Income Tax

Since 2020 was such an unusual year, it is important to look back to see where you spent time, even if it’s obvious that your domicile has not changed. That’s because you might have state income tax filing obligations under certain state’s laws depending on whether you are considered a ‘statutory’ resident.

Statutory residents

If you have a residence in a state other than your home state and spent more than 183 days there last year, some states consider you a “statutory resident” subject to that state’s income taxes on all your income.

This includes any dwelling suitable for year-round use whether owned or leased by the taxpayer or their spouse. For example, a New Jersey resident who decided to wait out the pandemic in his Hamptons vacation home or a New York resident who spent most of 2020 at her cottage in Connecticut could both fall into the statutory resident category—a class of taxpayers that is domiciled in one state and statutory residents of another.

States with statutory resident tax laws include Connecticut, Massachusetts, New Jersey, New York and Pennsylvania. So, if you own or rented a home in one of these states and spent more than half the year there, you’ll need to file an additional state income tax return and pay income tax in two states for 2020. And you won’t get credit from either state for taxes paid to the other.

Nonresident taxpayers

Another situation that has become common during the pandemic is living in one state and working in another, and not being at your office since last March. If you are an out-of-state telecommuter, you might not have stepped foot into your brick-and-mortar office or the state where it is located since the start of the pandemic. But you might still to have to pay income tax to that state under something called the “convenience of the employer rule.”

States that have this law want to collect tax on your wages even though you work from home in another state. These states include New York, Connecticut, Delaware, Pennsylvania, and newcomers like Massachusetts, which added the tax during the pandemic.

If you’ve always commuted from your home in one state to your office in another, let’s say from New Jersey to New York for example, the state of New York has been taxing your wage income even on days when you work from home. This has been true even on days that your employer allowed you to work from home. However, if you traveled out of state for work purposes, you could exclude income earned on travel days from your nonresident tax return. In other words, if your normal workplace is in New York and you are working from home in another state simply as a matter of convenience, you will still need to pay New York income taxes.

 

A Host of Other Tax Questions

But what if states had a shelter in place order? How do you deal with essential versus non-essential workers? Or what about if your employer or the building you work in simply could not be accessed? Were you still at home for your convenience? These questions are best answered by a tax professional who appreciates your unique tax situation, can help you quantify how much time you spent outside of your home state last year and understands all the nuances of state tax laws.

Taxing the income of workers who live out of state is a contentious issue. And it is under fire in some states. While New York appears to be sticking to its guns, New Hampshire recently sued Massachusetts over this practice and other states are piling on.

Our Tax Professionals Can Help

If you either spent time during 2020 outside of your home state or you worked for a firm in another state, we encourage you to have a conversation with a tax professional before filing your 2020 tax returns. If you’d like to speak with one of our tax professionals, please reach out to your Fiduciary Trust advisor and they can put you in touch with someone that can help.

 

 

 

This communication is intended solely to provide general information. The information and opinions may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

 

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