The Covid-19 pandemic of 2020-2021 created a trend that appears here to stay — performing your job not in your company’s office, but from your own home.
And the definition of “home” is a factor that workers — and their financial advisors — need to consider in approaching state income-tax strategies.
Elitza Christoff, head of tax services at Morgan Stanley, broached this topic with Claudio DeVellis, a tax partner with PwC (PricewaterhouseCoopers), during a recent Morgan Stanley podcast.
“State tax residency considerations and planning tips” was the topic of the July podcast, and DeVellis noted that PwC colleagues specialize in the area of residency and income-tax compliance. Morgan Stanley does not provide tax advice but can refer clients to third-party tax advisors, Christoff noted at the start of the podcast.
A Question of Residency
DeVellis said state residency is based on two main concepts: domicile and statutory residency.
“Domicile is the first threshold and is really a subjective test,” he said, adding it includes the place where people and possessions “nearest and dearest” to you reside. It is where one is registered to vote, for example, and where one has strongest ties to family and community. It is where a person has their permanent residence.
Statutory residency, by contrast, is a very objective test — a mechanical test, he said. A person may own a summer home and stay there for a limited period of time. But if the person lived and worked in that home during the pandemic, tax implications will arise if he or she “trips” the period of residency for that year. In that situation, a secondary home can become a statutory residence.
A second home becomes a statutory residence, with the attendant tax implications, if the owner spends 183 days or more there during a year. During the pandemic, many people have been working in a state different than the one where their company office is, or even than the one where their domicile is located.
Statutory residency is re-evaluated annually, unlike domicile, DeVellis noted. “You can have a residence in more than one state, but only one can be your domicile,” he added.
DeVellis said 2020 had a lot of cases where workers accidentally tripped the statutory residence status. There are some opportunities for tax credits from the domicile state, but the allowance of credits in these dual residence situations is limited, he added.
Employees caught in this period where they may be working in a different state from where their company is located should track their days worked in all locations.
“It’s important to keep track of the location where you are performing the services for your employer.”
“It’s important to keep track of the location where you are performing the services for your employer,” DeVellis said, adding it is especially so if the employer does not track your location. He noted that at PwC, employees must enter time and the location of their work, but not all employers do that.
Christoff noted that there are apps that can help employees track their time and location of work. For example, one such app is TaxDay.
New Work Model, New State Tax Issues
Christoff asked DeVellis if the new “hybrid model” for work that developed during the pandemic will continue.
“Covid brought a lot of this to light but it will be relevant in the future,” DeVellis said, adding that where income was sourced has to be accounted for. Residency will also affect state sourcing for income disbursed in the future.
To deal with tax implications of statutory residency, workers may benefit from strategies such as accelerating certain deductions — perhaps charitable donations — and postponing other actions, such as taking capital gains income, DeVellis said.
After you relocate, defer income when you can, DeVellis said, but options are often limited if you earned income in your old state. “Some of these things that are just about timing you should be able to plan around,” he said.
If you change your domicile by leaving one state, there are practical steps to take if you have no intention to return to your previous domicile, DeVellis said. “It usually takes a few years to establish a domicile,” he said, adding that process can start with a new driver’s license, voter registration, attendance in new social clubs, or religious affiliations.
Establishing a “clear break” makes it easier to establish a new domicile, he added.
But things can become more difficult if you plan to return to your old state or even keep your former residence. New residents who may still have their prior home should remember to stay in their new location for a sufficiently long period of time.
“Try to stay in the new location a lot more — don’t trip statutory residency in your old state by spending too much time on your return trips,” he said.
To hear the entire podcast, click here.
Patricia McDaniel is a freelance writer and editor and former journalist with Gannett’s New Jersey newspapers. She can be reached at [email protected].