Tax Residency Rules by State

Millions of Americans move to other states each year, whether it’s to take a new job, be closer to family, or live somewhere with lower taxes. And with more employees able to work virtually, many of them now have few restrictions on where they can call home. 

However, if you’ve moved to a new part of the country within the past few months, you’ll want to research the tax residency rules for both your new state and your old one—each state has its own code. Getting up to speed now can help you avoid big hassles down the road.  

Residency Status 101

For income tax purposes, you’re the resident of a given state if you meet either of the following conditions:

• 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.

At any given time, you can only have one domicile. However, that doesn’t mean that another state can’t claim you as a resident for tax reasons. If you’re moving between states, establishing that new domicile as quickly as possible can help you avoid any confusion regarding which states you need to file a tax return for. 

In a worst-case scenario, failure to establish your new primary residence can lead to paying taxes on your full income in both your new state and the previous one. According to the tax advisory firm Baker Tilly, more states have started to audit former residents who have changed their domicile, which makes it even more imperative to get things right. 

How do you establish your new domicile? States will look at your place of employment as well as the nature of your job—whether it’s permanent or temporary. Here are some other steps you’ll want to take: 

• Update your mailing address with the postal service and have bills and financial statements sent directly to your new home.
• Obtain a driver’s license in your new state.
• Register to vote in your new state.
• Close any accounts at local banks in your old state and open a new account in your new one.
• Buy or rent a home in your new state and sell any residences in your former state.
• Record how many days you spend in your new state versus your previous one.

Depending on where you live, state revenue departments can take a surprisingly deep dive into your personal and financial records, even looking at what church you belong to and whether you’ve seen a local doctor. The more documentation there is of your presence in a new state, the harder it is for the previous state to claim you as a resident anymore.

Moving to Another State

According to our research, seven states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming—don’t have a personal income tax. Residents in New Hampshire only have to pay tax on dividends and interest earnings, while residents in Washington state only have their capital gains income taxed if they are in a high enough bracket. Still, in most states, you have to file a return if you earned income there—whether through wages or self-employment—or generated income from real property in the state.

Even when you establish a new domicile, you typically have to file a return in both states for the year in which you moved. You’ll want to look up how each state classifies “full-year” and “part-year” residents, so you know which form to complete. Some states classify you as a full-year resident if you lived there for at least 183 days, although others have different thresholds. Making a log of how many days you spent in each one can spare you toilsome investigative work later.  

A state where you spent part of the year may require you to report income from all sources, just as you would if you were a full-year resident; when you calculate the tax, the amount then decreases based on the amount of time you lived in that state. In other jurisdictions, you would figure out how much income you earned while living there prior to determining the tax. 

If you move to a neighboring state but continue to work in your old state, be sure to research whether the two governments offer income tax “reciprocity.” This is a special arrangement between states in which you only pay taxes where you are domiciled, as long as your work in the other state was your only source of income. Any earnings from other sources, such as rental income or lottery winnings, are generally not included.

Living and Working in Different States

What happens if you work in a different state than the one you call home? In most of the country, you’ll have to file a non-resident return in the state where your company is located (if you’re an employee who receives a W-2, your employer probably withholds taxes throughout the year). You likely also have to submit a resident tax return in the state in which you’re domiciled.

Fortunately, most states provide a credit to help offset taxes paid to another state. Unfortunately, not all do so, or the state may not extend that credit to investment income. Residents of New York who work elsewhere, for example, may find their interest and dividends taxed by two different states.

Things are much simpler for those who live in a state that grants income tax reciprocity to neighboring states. As long as your only income was from wages earned in a state with such an agreement, you only need to file a return in the state where you live.

Residents of Illinois, for instance, don’t have to pay tax on income earned in Iowa, Kentucky, Michigan, or Wisconsin—they only need to file a return in their home state. If any of those states deducted income tax throughout the year and you lived in Illinois, you’d be eligible to claim a refund on that withholding.

COVID-19 and Temporary Moves 

For many workers, COVID-19 office closures meant they were no longer tethered to their primary residence—suddenly they could work anywhere that had internet service. However, living in another state for a prolonged period can have tax consequences, so you have to be careful to file the appropriate returns in each state, if necessary.

The 183-day and Convenience Rules

A state with a 183-day residency rule, for example, will consider you a full-year resident for tax purposes if you spent more than half the year there. Suppose your domicile is in California, but with your employer’s office shut down, you decided to live with your sister in Illinois beginning in April. Because you spent more than 183 days in the former, you’re considered a dual resident. 

Going forward, you can avoid that scenario by simply spending fewer than 183 days in your “temporary” state—Illinois, in our example—which could mean going back to your domicile for the required length of time or even spending a few weeks in another state altogether. Or, if you decide to stay in Illinois, you could set up a domicile there to avoid any claims California would have on your income.

With states losing significant revenue due to COVID-19, experts such as Kim Rueben, project director of the State and Local Finance Initiative, an Urban Institute project in the Urban-Brookings Tax Policy Center, predict that many states are going to be aggressive in claiming income tax from residents who spent most of the year somewhere else. Thus, you need to be vigilant about filing returns in any state where it’s required. 

Jurisdictions that have “convenience rules” pose a particular challenge for telecommuters. Six states—Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania—let employers withhold income tax even if the worker doesn’t live there. That may be a rude awakening for workers who traveled to a different state only to find that the state where their company is based wants them to pay up. 

Snowbirds

And what about so-called “snowbirds,” who leave their chillier states for sunnier weather, and sometimes lower tax rates, down south? If, for example, your permanent home is in New York and you fly down to Florida (a no-income-tax state) during the colder months, there’s a good chance New York will want to tax all your income for the year—not just what you earned within its borders. 

To avoid that, you have to establish a domicile in the Sunshine State—voting, getting a driver’s license, and registering a car there is a good start. New York, known for its vigorous audits, is also likely to check that your Florida home is of a size that is comparable to what you occupy up north. You also have to spend at least 183 days of the year in Florida. If New York’s revenue agency comes after you, you’ll want to show receipts or any other documents that can back up that claim.

There are many traps, especially if you spend part of the year in a state with an aggressive taxation department. It might be worth your while to consult with a tax specialist if you’re planning to change your domicile while living part of the year in your old state. The last thing you want is to get it wrong and have unpaid tax bills accruing without your knowledge.

The Bottom Line

Knowing where to file taxes will depend on state-specific residency rules. If you recently moved or spend a significant amount of time away from your main home during the year, you’ll need to bone up on each one’s requirements. They are complicated, so it may be worth consulting a tax expert. Those considering purchasing a second home in another state would also do well to investigate the tax implications.

This handy table, compiled with information from individual government websites and tax preparation software company TaxAct, will help. The website TaxSlayer.com is a useful place for finding your state (or, in the case of D.C., city) tax website.