Temporarily Relocating to an Out-of-State Secondary Home Due to COVID-19? You May be Subject to Double Taxation on the Same Income

COVID-19 News and Updates | Prager Metis| Jonathan Gold  &  Robbin E. Caruso | Sep 05, 2020

As the CORONA VIRUS Pandemic spread across the United States at the end of March, much of the Country was required to shut down business operations because of governmental stay-at-home orders.  This required employers to allow workforces to work remotely where possible.  In addition, employees found themselves required to accommodate their children at home as schools and daycare centers were forced to close their doors. 

Many people who had their primary residences or were domiciled in densely populated areas found themselves moving to secondary home to reduce the risk of exposure to COVID-19 and to have more safe spaces for their children to learn and play.  For example, clients who resided in a relatively smaller New York City apartment moved to their larger vacation home in Connecticut, when their employer closed offices and they were required to work remotely.  Their intention is to move back home when the lockdown orders are lifted, and the employer’s offices are reopened.  This may not occur until sometime in 2021. 

Unbeknownst to a lot of such taxpayers, they may have unintentionally created a situation in which the income earned may be taxed by both the primary and secondary states.  This is commonly known as dual or double taxation. 

Did You Unintentionally Create a Dual Residency and Subject Yourself to Possible Dual Taxation? 

Using the information in the above example, the taxpayer’s domicile, or true home for state income tax purposes, would be New York.  Under that state’s laws, this does not change until the taxpayer overtly gives the domicile up and takes the necessary steps to establish a new one.  To complicate thingsmost states, including New York, consider a person to be a statutory resident for income tax purposes if they spend at least 184 days within that state during the tax year.  This is true even if their permanent home, or domicile, is in another state.  Returning to our example, the taxpayer would be considered a resident/domiciled in both New York and Connecticut if they spent at least 184 days in Connecticut.   

This does not apply to all states, however, as some have reciprocity agreements with neighboring states, such as Maryland, Virginia, and Washington, DC or New Jersey and Pennsylvania. In addition, other states are allowing tax credits or other remedies to provide relief.  However, not all states have addressed this issue and Prager Metis is carefully monitoring legislative actions to ensure its clients report taxes to the proper state(s) and appropriately apply all relief available. 

What You Should Do Now to Minimize Any Double Taxation 

The determination as to whether you are subject to taxation of the same income by multiple states is based on all facts and circumstances.  The most common factor is the amount of time you spent in each state with the most common magic number of 184 days.  If you moved to a secondary home at the start of the Pandemic, that threshold is quickly approaching or may have already passed for the 2020 tax year. 

We recommend that you create and maintain a detailed record of the days spent in each state and for what purpose.  If you determine that you are close to the 184-day threshold at your temporary quarters or have already exceeded that number, immediately contact your Prager Metis tax advisor to understand the tax implications.  If you are thinking about making the move permanent, we recommend that you reach out to your tax advisor to discuss planning and what is needed for implementation as proving domicile later may be difficult for some states. 

Obviously, one may question the fairness of being subject to tax on the same income by two (2) separate states given the current state of affairs.  State legislators are aware of this issue and the unique circumstances created by the Pandemic, but not all have enacted laws to address the situation at this time.  It is expected that each state will provide some sort of relief, which Prager Metis is closely monitoring to provide the most up to date guidance available.  Although changes may be forthcoming, the more prudent and safer approach is to plan according to current laws and not what may occur in the future. 

We encourage you to speak with your Prager Metis tax advisor, if you believe you are in this situation or exposed to the possibility of dual taxation.  Our office is highly qualified to determine the tax implications, provide guidance for your next steps, and obtain the latest information on how States will approach dual residency for the 2020 tax year and beyond.