Each year, millions of people move to new locations. Many continue to move even during the coronavirus pandemic, or have postponed moves they plan to make in the near future.
Moving across state lines, whether near or far, for career or personal reasons, can have significant tax implications.
Financial advisors often know when clients are relocating and can help them become aware of potential tax complications.
There are different situations for clients to consider when filing 2019 tax returns, including relocating to a new state or spending significant time in another state.
Direct, Indirect Taxes
Each state has its own tax laws, administered by its own taxing authority. New residents of a state will be subject to the applicable individual tax. In most cases, this means an extra state tax return to file.
Keep in mind, income taxes vary widely across the states. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) do not impose any income tax on individuals, whereas California’s income tax has a top marginal tax rate of 13.3%.
Indirect taxes also vary, whether property tax, a car-ownership tax, or more. Some of these taxes paid during the year may be deducted by the state at tax time.
Part-year residents pay for the period lived in each state. Movers may have to file multiple state tax returns in the year of the move. In some cases, they may need to consider a municipality tax, too.
Even more, tax reporting can become exponentially more complex if a client crosses a country border.
Time Spent in Another State
Movers must watch out for individual state laws, even if it is not permanent. States have varying rules about what constitutes residency for tax purposes.
As an example, if a Florida resident traveled to New York frequently and for extended time totaling more than 183 days in a given year, New York may classify the individual as a statutory resident for tax purposes.
A scenario like this can have a significant tax effect, because potentially all the individual’s income could be taxed in New York (a higher income tax state) rather than Florida (a zero-income tax state).
If time is spent in other states, but not enough to be classified as a resident, clients may still have additional tax filings. A common scenario is for employees who travel for work to various states in a calendar year.
They may receive a W-2 from their employer indicating the amount of wages earned in each state, which could result in filing a non-resident tax return for these states to report the allocated wages.
Despite the complexity of additional tax filings, there is a silver lining: In most cases, states allow residents to claim a credit for the taxes paid to non-resident states. This is key, as it avoids individuals being unfairly “double taxed.”
Travelling clients who are full-time employees may assume their taxes are D-I-Y simple. But people who move, particularly across state lines, often benefit from professional guidance with tax filing.
Whether bringing reams of paper to a traditional tax office or using an on-demand digital tax service with access to a professional, like EY TaxChat, clients should be guided to make sure their tax service of choice is qualified to manage multi-state complexity.
Well before thinking about filing, investment clients will appreciate an offer of practical tips to help reduce tax confusion from a move.
1. Establish residency in the new state.
Each state has specific requirements to become a legal resident, but some are widely accepted first steps in the process, such as: updating a mailing address, obtaining a driver’s license in the adopted state, and registering to vote.
2. Employees should inform their payroll department of a move.
Providing accurate information, such as the date of the move and new address, will ensure that payroll records and wages are reported correctly, which in turn will help when it comes filing tax returns.
3. Frequent travelers need avid records.
Records of travel dates, places and receipts of travel costs offer supporting documentation to manage states that compete for a client’s residency.
The Bottom Line
Clients who move may carefully maintain a steady investment portfolio yet be unaware of the potential for expensive tax implications.
A discussion that starts with making reporting just a little easier for clients can also help advisors uncover investment tax implications and help clients revisit financial plans.
Financial advisors can be the first to notice and recommend ways to manage the added complexities of proper state tax filing.
Dina Pyron is Ernst & Young’s Global EY TaxChat Leader.