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My company no longer has a physical office and I am relocating: will the taxes start to be paid in the new state?

Personal Finance & Money Asked on May 15, 2021

The address of my employer is in StateA. We shut down the physical office for my division last year – and there are no plans to ever reopen. We meet on Zoom frequently every day and that is the plan going forward.

I am potentially moving to StateB in the middle of this year. Will I be filing taxes in two states and paying taxes at different rates based on the proportion of the year in StateA vs StateB? Are there any formal declarations that I or my company would need to do now to inform the IRS – or is this simply a routine part of filing 2021 taxes?

Note that this question about NY/NJ (which aren’t my particular states) seems to indicate the taxation would happen at the higher rate State taxes for convoluted NY/NJ work situation. Would that be true for the entire twelve months or just the portion of the year residing in the higher rate state?

2 Answers

The exact rules depend on the pair of states. Some states try to grab all the income they can, others work together. For example if the two states are DC/MD/VA then you pay based on where you live not where you work.

You don't have to inform the IRS, because they really don;t care about your state taxes. Yes you can deduct them, but they don't care which state can claim you.

You will want to adjust the state W-4 as soon as you make the switch so that the withholding is close to reality. The actual calculation will take place when you file, the withholding form is used to determine who where money is sent during the year.

Will I be filing taxes in two states and paying taxes at different rates based on the proportion of the year in StateA vs StateB?

Yes expect to have to file with both states. You will probably have enough income in each. The split will not be based on the number of days, but you will assign each chunk of income to one state or the other. It will only match the number of days if the income is steady.

Watch how they handle deductions and exemptions based on time in the state.

Are there any formal declarations that I or my company would need to do now to inform the IRS - or is this simply a routine part of filing 2021 taxes?

Check with the states. You will want to change your license, registration and the like to the new state.

Some states try to grab all the income they can. If you live in one state, and work in another that is when you are guaranteed to pay the higher rate. But if the break is clean, then only one state can claim the income.

Correct answer by mhoran_psprep on May 15, 2021

Don't confuse two separate issues: 1) Having to file two states' tax returns because you were a part-year resident of one and a part-year resident of the other, and 2) Having to file two states' tax returns because the same piece of income is taxed by both states. It sounds like you are changing your residence, so you will likely be a part-year resident of one state and a part-year resident of the other, but that does not mean that any piece of income is taxed by both states. Conversely, even if you didn't change your residence, it's still possible for some income to be taxable by both states.

Generally, you are taxed on a piece of income by both your state of residence and the state of the source of the income. If those happen to be the same state, then there are no double taxation issues. If those happen to be different states, then (unless there is an agreement between the states) the income will need to be reported on both states' tax returns, and you can take a credit on one of them (equal to whichever of the two taxes is less).

For work salary, the source of the income is generally where the work was performed, i.e. where you were physically located during the hours when you were working. If you were remotely working in another state, even if briefly, then the source of the income for the times you worked in that state, is considered to be that state. This part should be relatively straightforward to determine.

Residence is more complicated, and every state has its own rules, and sometimes it has more to do with your intent than where you are located.

Letting your company know where you work helps them to withhold the right state's taxes, but if a sufficient amount is not withheld in the right state at the right time, you can pay estimated taxes yourself. When you file a state's nonresident or part-year resident state tax return, it will be up to you to specify how much of your federal income is taxable by that state, according to the residence and source-of-income rules.

Answered by user102008 on May 15, 2021

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