Filing your taxes is hard enough, but it can be even more challenging if you spend time living in two different states during the year. Retired residents of northern states who spend the winter in a warmer climate—so-called snowbirds—are a common example. Then there are people who move from one state to another, for a new job or to be closer to family.
“Snowbirds face several tax challenges based on their changing living situations,” says Carl Breedlove, a lead tax research analyst at The Tax Institute at H&R Block. He warns that snowbirds and other taxpayers who live in more than one state during the year need to consider their residency, income sources, and potential tax credits to ensure their tax filings are accurate.
Failing to properly file taxes if you live in multiple states throughout the year can lead to frustrating and expensive consequences. No one wants to face a tax audit, much less deal with the rigamarole of amended returns and late filing fees.
First, identify your state of residency
The first job for two-state taxpayers is to determine their state of legal residence. According to Breedlove, many states use the physical presence test, which asks whether a taxpayer spent 183 days or more in the state to determine statutory residency. Some states require taxpayers to identify their “domicile” to determine residency.
“Determining domicile takes a little more analysis,” says Breedlove. “Domicile is usually defined as the place where the taxpayer establishes themself with the intention of making it a true, fixed, permanent home. This is a facts and circumstances test, and the taxpayer will retain their domicile until they take steps to change it.”
While you can only have one domicile, another state can still claim you as a resident for tax reasons.
Each state has its own method of determining what defines a domicile, and the rules can be found on the current year’s tax forms. Typically speaking, however, a domicile is determined by one of the following methods:
- Obtaining a driver’s license
- Registering to vote
- Filing a “Declaration of Domicile” (not used in every state)
- Changing a mailing address
Nine states do not charge income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. There are two caveats: New Hampshire taxes interest and dividend income, while Washington taxes some long-term capital gains.
Many snowbirds flock to states like Florida for the winter, and establishing a home there as your domicile can be attractive since there’s no income tax. But this process can be tedious, and may not be right for everyone—especially if you earn income in multiple states.
Earning income in multiple states mean filing multiple tax returns
If you lived in multiple states during the year, you’ll typically need to file tax returns in each state where you resided. Your residency status in each state determines how you file:
- Part-year resident: If you pack up and move from one state to another, you’ll likely file as a part-year resident in both states.
- Resident and non-resident: If you lived in one state but worked in another, you’ll generally file as a resident in your home state and a non-resident in the state where you worked.
Part-year residency is most common when you move across state lines, changing your domicile location but without intent to regularly earn income in multiple states.
For snowbirds, filing separately as a resident in one state and a non-resident in a second state is more plausible. Breedlove shared an example of what this might look like.
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“If a taxpayer lived in Chicago for most of the year, but relocated to Arizona for the winter months, they would file a resident return in Illinois since that is likely their state of residence. If they earn some income in Arizona, say from a consulting gig, they will file a non-resident return in Arizona.”
He continues to break down the types of income that may be received and how they should be reported:
- Income from wages is generally sourced and taxed in the state where the work is performed.
- Self-employment income is similar, referring to the state where the income is earned.
- Retirement income is only taxed in the taxpayers’ state of residence.
Keeping in mind the different residency statuses, determining who will need to file which types of returns starts to become more clear. I’ve seen several of the combinations in my own family.
When I moved from Indiana to Kentucky but kept the same job, I filed a return as a part-year resident in each state. Another family member is a contractor who travels the country for various jobs—they receive self-employment income at each job site, and need to file non-resident returns for each state that has income tax. My grandparents, who reside in Indiana but spend the winters in Florida, only receive retirement income and file as Indiana residents.
“[Retirement] payments received while in a secondary state are not taxable by that state, and if that is their only income, they likely wouldn’t have to file a non-resident return in most cases,” says Breedlove.
It’s possible you’ll file the same taxes twice—but you may get a credit
“Some states require their residents to pay tax on all their income no matter what state it is sourced to,” says Breedlove. If both your home state and the one where you earned the income require you to report the earnings on a state tax return, it may end up looking like you’re paying taxes twice.
Thankfully, credits exist to help alleviate this issue and prevent double taxation. Each state has its own rules, but generally, the process includes filing any required non-resident returns first. Then when you file your resident return, it will report tax paid to the other states. Then, you claim a credit for that tax so you aren’t taxed twice on the same income at the state level.
There are a few things you should do to help keep the process as painless as possible:
- Maintain accurate records of your residency and work locations throughout the year
- Learn about the specific tax laws and residency rules for each state involved
- File timely and accurate returns for all relevant states
- Consider consulting with a tax professional experienced in multi-state taxation
There’s a wealth of options for filing taxes online with clear walk-throughs, including new options for free tax filing through the IRS. If you’re ever in doubt about what to report, consult a tax professional to make sure your travels don’t bring about any unwelcome surprises.