How To Avoid Double Taxation

Your tax residency status determines which state has the right to tax your income, making it a critical consideration if you’ve recently moved or expect to relocate. However, each state has its own rules for establishing tax residency, and failing to understand them can lead to unexpected penalties or tax liabilities.

Here’s what you should know about state of residence rules to avoid tax issues, including how tax residency is determined, the implications of dual tax residency, and the special considerations for remote work and seasonal living.

State of Residence Rules for Tax Purposes

Most states use two primary factors to determine tax residency: domicile location and statutory residency.

Your domicile refers to your permanent home, generally defined as the place you intend to return to after any temporary absences. Meanwhile, statutory residency typically means you spend a certain amount of time somewhere in a given year, such as 183 days.

Typically, a state can treat you as a resident for tax purposes if you’re domiciled there or meet its statutory residency test. As a result, you can qualify for tax residency in multiple states, which may lead to double taxation on your income.

To avoid this, you must understand state tax residency rules, take the necessary steps to establish your domicile promptly after moving, and keep a record of where you spend your time.

General Rules for Establishing Domicile

When you move to a different state, establishing your new domicile as soon as possible can help prevent confusion over your tax residency and minimize the risk of complications. Some of the primary ways to document your change in domicile include:

• Registering to vote in your new state
• Renting or buying a residence in your new state
• Obtaining a driver’s license from your new state
• Updating your address with institutions like your bank, the U.S. Postal Service (USPS), and the Internal Revenue Service (IRS)

The more documentation you have, the easier it is to withstand residency audits. These occur when a state tries to verify your residency claims and may be more likely if you move from a high-tax state to a lower-tax state. They can involve tax authorities reviewing your financial records, travel history, and even social ties—such as which local groups you belong to—to determine your actual tax residency.

State-Specific Statutory Residency Rules

The statutory residency test is a tool for establishing tax residency across the U.S. However, not all states use a 183-day rule. Some set significantly different thresholds for statutory residency. Examples include:

• New Mexico: 185 days
• Hawaii: 200 days
• Idaho: 270 days

Some states have other subtle but notable variations in their rules. For instance, New Mexico only counts full 24-hour days toward your statutory residency threshold, while New York includes partial days.

Additionally, “place of abode” clauses sometimes also apply, which require you to maintain a permanent place of abode—rather than temporary accommodations—in the state for a duration. For example, New York requires you to have a permanent place of abode for “substantially all of the taxable year” and meet an 184-day threshold to establish statutory residency.

Tax Implications of Dual Tax Residency

Qualifying as a tax resident in more than one state can lead to double taxation, where multiple states claim the right to tax your worldwide income for the same tax year. That often happens when you meet the domicile test in one state and the statutory residency test in another. However, it can also occur if you:

• Own real estate in more than one state
• Live in one state but work in another
• Move to a new state but fail to establish domicile properly

Some states offer credits for taxes paid to other states, which can mitigate the effects of double taxation. However, these credits vary significantly by state and may not always fully offset the extra tax liability.

Reciprocity Agreements Between States

Certain states have reciprocity agreements with each other, allowing residents of one state to work in another without being subject to the second state’s income tax. Instead of filing taxes in both states, you only file and pay income tax in your tax residence, simplifying the tax process and reducing the risk of double taxation.

Reciprocity agreements are most common in states where workers commute across state lines. For example, some states with reciprocity agreements include:

• Arizona: California, Indiana, Oregon, and Virginia
• Illinois: Iowa, Kentucky, Michigan, and Wisconsin
• North Dakota: Minnesota and Montana

When reciprocity doesn’t apply, you typically must file a non-resident tax in the state where you work and pay taxes there. You must also file a resident return in your home state, where you may avoid double taxation if a credit is available for taxes paid to another state.

Special Considerations for Remote Workers

Remote workers who live and work in one state but are employees of a company in another may face unique tax challenges due to “convenience of the employer” rules.

Typically, remote workers only owe state income tax where they live and work. However, under convenience rules, your employer’s state may also claim the right to tax your earnings, unless you can demonstrate that you’re working outside the employer’s state for their convenience, not your own.

Eight states have convenience rules:

• Alabama
• Connecticut
• Delaware
• Nebraska
• New Jersey
• New York
• Oregon
• Pennsylvania

Connecticut and New Jersey’s convenience rules only apply to those who live and work remotely in other states with convenience rules, such as Alabama or Nebraska. Meanwhile, Oregon only enforces convenience rules for nonresident taxpayers who perform managerial functions for their Oregon-based employer.

Considerations for Snowbirds and Seasonal Residents

Snowbirds and other seasonal residents who split time between states may reduce their tax burden by establishing tax residency in the lower-tax state. However, the higher-tax state may try to claim the right to tax your income, so you must be prepared to prove your residency in an audit.

For example, if you divide your time between New York and Florida, filing as a Florida resident could save you significant taxes since Florida has no income tax and New York has relatively high rates. To do so, you must meet Florida’s domicile or statutory residency requirements while ensuring you don’t qualify as a tax resident under New York’s rules.

The Bottom Line

Understanding tax residency rules is essential for avoiding tax issues, like penalties and double taxation. While domicile rules are generally consistent across the U.S., statutory residency requirements vary significantly between states, and factors like convenience rules or reciprocity agreements can add complexity.