Tax Implications of Dual Residency: Living In Two States

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Maybe you live in one state and work remotely in another. You might even have a domicile in one state, but spend much of your time in another. Or you could have recently made a major move from one state to another.

Whatever the case, being a dual resident comes with its own tax implications and rules. In some cases, you could be required to file state income taxes in both locations.

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Key Takeaways

• Dual state residents could be liable for income tax in both states
• You may be considered a dual resident if you spend at least 183 days in one state and the rest of the year in another.
• Understanding your state residency status can have a major impact on your yearly tax liability

Dual State Residency: Is It Possible?

While many Americans have only one state residency, it’s possible to be a dual state resident — at least as far as tax purposes go. But the laws and regulations around this are tricky.

When it comes to income tax, you’re generally considered a state resident if your domicile is within that state. A domicile is a “state of legal residence” — that is, the place you consider to be your permanent home for legal and tax purposes. Your state of legal residence determines things like:

• How your income is taxed at a state level
• Whether you’re eligible for in-state tuition
• Your voting rights
• How your marriage (and divorce) are handled in the court of law
• Where your will is probated

What Is a Statutory Resident?

You can call anywhere home, but you can only have one domicile at a time. But it’s also possible to be considered a “statutory resident.”

This is someone who has a domicile in one state but spends most of the year — at least 183 days — in another. As a statutory resident, you’re typically required to pay income taxes in both states.

How to Qualify as a Dual State Resident

You could be considered a dual state resident (and have to pay taxes in both states) if you:

• Work in one state and live in another
• Own and earn income from rental properties in different states
• Run a business in multiple states
• Sell property in a non-resident state (capital gains could be taxable in that state)
• Earn income from trusts or estates in different states (e.g., you’re a beneficiary of a trust or estate in another state)
• Telecommute for an out-of-state employer (i.e., remote work)
• Spend more than half of the calendar year — 183 days — in one state (statutory resident)
• Moved from one state to another during the year but don’t establish a new domicile
• Own residential property in two states
• Relocate temporarily to one state

Understanding Taxes in Two States

If you lived or earned income in more than one state this year, you’ll likely need to file tax returns in both. How much you owe depends on the states involved.

Each state sets its own rules for tax rates, deductions, and which types of income are taxed — including wages, FICA taxes, and capital gains. Nine states don’t have a regular state income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Here’s the general rule: your resident state taxes all of your income, no matter where you earned it. So if you live in one state but worked in another, your home state still wants its cut of everything. The state where you earned the money — your nonresident state — may also tax that portion.

The good news is that some states have reciprocity agreements with each other. If you live in one state and work in another, these agreements can let you pay income tax only to your resident state. You’ll usually need to file a withholding exemption form with your employer to take advantage of it.

Proving Your State Residency

Establishing your residency in a state involves more than just spending time there. If you want to avoid getting taxed in two states, you’ll need to prove your residency in one state.

Here are some ways to do this:

• Secure a permanent address: If you own a home, this is straightforward. If you rent, make sure your name is on the lease and you have utility bills in your name at this address.
• Register to vote and get a state driver’s license or ID
• Maintain local financial accounts: Having a bank account or investment accounts in the state can support your residency status. It shows financial ties to the area.
• Keep records of your physical presence: Save documents like flight itineraries, hotel receipts and event tickets to prove you spend significant time in the state.

Remember, the requirements can vary, so it’s wise to check the specific criteria of the states where you’re claiming residency.

Tips for Managing Dual State Residency

Sometimes, dual state residency is simply unavoidable. If you’re a dual resident, this can help you simplify the tax implications of your situation:

• Keep detailed records: Document your income sources, where you earned your income and how many days you spend in each state.
• Understand state laws: Each state has its own rules about residency. Knowing these can help you plan and possibly reduce your tax liability. Be aware that tax laws can change.
• Get assistance from a tax advisor: A tax professional can help you navigate the complexities of filing taxes in two states, ensuring you don’t pay more than you owe.

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