Residency, sourcing, and agreement
Your bill depends on where you are resident, where your income is sourced, and whether the two states agree about both. You can only use the headline rate once you know all three.
Key takeaways
Resident vs. nonresident
Your resident state taxes income you earn anywhere. A nonresident state taxes income sourced to it. Both states can treat you as a resident in the same year.
The credit only helps if you file
Your resident state gives you a credit for tax paid to another state, capped at what your resident state would have charged on that income. You have to file in both states to claim it.
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The starting point
How states divide up the bill
People compare states by looking up two rates and subtracting. You can only use a rate after you know which state taxes which income, so work out residency and sourcing first.
01Residency
How states decide whether you are a resident
- Domicile. The permanent and primary residence you intend to return to after being away. You keep it until you can show with clear and convincing evidence that you abandoned it and established a new one, which means shifting the focus of your life to the new location.
- Statutory residency. Many states also treat you as a resident if you keep a place to live there and spend enough days in the state, whatever your domicile. New York sets that at 184 days or more, combined with a permanent place of abode maintained for substantially all of the taxable year, and counts any part of a day as a day. Other states set their own thresholds.
- Two states can both treat you as a resident. Each state writes its own rules, so someone domiciled in Florida who keeps a New York apartment and spends 184 days in New York is a Florida domiciliary and a New York statutory resident. Both states then tax income from every source.
What a state asks for in a residency audit
A state auditing you asks for proof of where you were on every day of the year, and proof that you moved your life rather than your paperwork. New York publishes audit guidelines showing how its auditors work through both.
- Records of your days. A log you kept at the time, backed by travel bookings, card statements, toll and transit records, and phone records.
- The place you kept to live in. Whether you maintained somewhere suitable for year round living, for substantially all of the year. New York calls this a permanent place of abode. You do not have to own it, and a lease or a room at a relative’s home can count.
- Where your life is. Where you keep your home, where your family lives, where you run your business, and where you keep the possessions you value.
- Your evidence, not the state’s. You have to prove you changed domicile. The state does not have to prove you did not.
Gather these as the year goes along. Two years later, under audit, you will be reconstructing them from memory.
02Sourcing
How states source each kind of income
- Wages. States generally source wages to where you physically performed the work. New York and a few other states depart from that under the convenience of the employer rule.
- Business income. Apportioned under each state’s own formula, which differs.
- Real property. States source it to where the property is located, whatever your residency. Own property in another state and you file a return there every year, whether or not it produced income.
- Investment income. Usually taxed only by your resident state, which is why moving matters more for a portfolio than for a salary.
03Remote work
Working remotely for a New York employer
New York taxes your remote days as New York days if your main office is in New York State. Where you physically worked does not change that.
Your days count outside New York only where your employer has set up a bona fide employer office at the place you work from. That takes deliberate steps by the employer. Choosing to work from home, or having your employer agree to it, does not meet the standard, and New York calls this arrangement telecommuting in its own guidance.
- Who this applies to. Nonresidents assigned to a New York office who work some or all of their days from another state.
- What you end up filing. Your home state taxes you as a resident and New York taxes the same wages as New York source income. You claim the resident credit to avoid paying twice, which means filing a New York nonresident return you might otherwise have skipped.
- What New York looks at. Your employer’s arrangements, documented at the time. New York weighs a list of factors set out in a 2006 memo and gives little weight to your reasons for working from home.
A few other states apply their own versions of this rule. Check what the state your employer is based in does before you assume your days count where you worked them.
04The credit
The credit for taxes paid to another state
Your resident state gives you a credit for tax paid to another state on the same income. New York allows the credit only for the portion of the other state’s tax on income sourced to and taxed by that state while you were a New York resident, and it does not refund any excess.
Your resident state limits the credit to what it would have charged on that income. Move from a low rate state to work in a high rate one and you pay the higher of the two overall.
Claiming it requires filing in both states. Missing the non resident return does not save you money, it just means the credit never gets claimed.
Worked example
Why the credit doesn’t always erase the difference
| Amount | |
|---|---|
| Income sourced to and taxed by the work state | $100,000 |
| Tax owed to the work state at an illustrative 9% rate | $9,000 |
| Tax your resident state would have charged on that income, at an illustrative 6% rate | $6,000 |
| Resident-state credit allowed (capped at the resident-state amount) | $6,000 |
| Refund of the excess from your resident state | $0 |
| Total tax paid across both states | $9,000 |
This is an illustration of how the cap works, not a computation for any specific taxpayer. The actual credit depends on each state’s own rules and exactly which income is sourced to and taxed by each state.
05Where people go wrong
Common mistakes when moving or working across state lines
- Moving without leaving. Keep a home, a driver’s license, voter registration and a doctor in the old state and that state can audit your residency. New York looks at all aspects of a person’s life, and you do not establish a new domicile just by filing a certificate of domicile or registering to vote elsewhere.
- Assuming no income tax means no filing. A state without a personal income tax can still have other taxes, and your former state may still want a part year return.
- Timing a move badly. Sell a business, exercise options or settle equity in the year you move, and the state where you were resident on that date taxes the whole amount. Part year residents split the year, so moving a week earlier or later changes which state taxes it.
Related reading
More on residency and multistate taxes
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On working across state lines, and getting the numbers right
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Work out which state gets what
Work out which state gets what
Tell us where you live, where you work, and what changed this year. We will tell you which returns you owe and whether the credit covers you. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising New York businesses and individuals. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.