Global Tax Insights
3 Things You Should Know About Double TaxationNovember 30, 2015
If you own homes in more than one state or spend time in multiple states, then you may be at risk of double taxation.
If you own homes in more than one state or spend time in multiple states, then you may be at risk of double taxation. Sometimes just working in another state can be enough to trigger double taxation.
1. States Can Tax Your Income Under a Variety of Circumstances
To assess your risk, you need to be aware of some basic concepts related to multistate taxation:
Domicile. This is your “true, fixed, permanent home.” Your domicile doesn’t depend solely on the amount of time you spend there; more important is your intent to ultimately return there after having been away, whether absent for a short or an extended period of time. Indicators of domicile include things such as being registered to vote in the state, having a driver’s license from the state and using your address there on important documents such as tax returns, insurance policies and wills and trusts. Your state of domicile typically will have the power to tax all of your taxable income, regardless of where it was earned.
Statutory residency. A state may consider you to be a resident if you maintain a place of abode there (regardless of whether you own the home) and you spend a certain amount of time there, typically more than half the year. So you could be domiciled in one state, but another state might treat you as a statutory resident. This state also would have the power to tax all of your taxable income.
Income earned within a state. If you have income derived from a source within another state, that state has the power to tax that income. One example occurs in large multistate metropolitan areas where it’s common to live in one state and commute to another for work. In this situation, the state where you work could tax your compensation from that job even if you don’t live in that state.
2. Credits Don’t Eliminate Risk
Based on these three taxation concepts, the same income could, in theory, be taxed in three or more states — such as if you’re domiciled in one state, considered a statutory resident of another state and earn income in a third state. Fortunately, in many situations this result can be avoided via tax credits offered by many states for taxes paid to other states. Also, a U.S. Supreme Court decision earlier this year struck down a Maryland tax structure that resulted in double taxation on income earned in other states.
But the decision doesn’t make all double taxation unconstitutional. It addresses only a particular type of tax structure. And there are still situations where tax credits aren’t available. Investment income, for example, could be taxed in the state of domicile and the state of statutory residency with no offsetting credit allowed by either state.
3. Multistate Taxation Is Complicated
As you can see, multistate taxation is complicated. If you own homes in multiple states, spend time in multiple states or reside in a different state from where you work, we can help you assess your double taxation risk and provide ideas for reducing it.
Please contact us to learn more.