Understanding Your Tax Home, e.g. “Do I Have To Pay California Tax?”
“My wife and I are going to be working in California for part of the year, do I have to pay taxes in California?” asked someone recently. Another client was recently playing fast and loose on which state their income was taxable, resulting in a telephone call from one state tax authority and a LOT of penalties. Your tax home is an important consideration that most people know nothing about.
When it comes to which state you have to pay income tax to, your tax “home” is the primary element, and your place of earning is the secondary element.
What’s a tax home?
Your tax home is where you LIVE. Not where you “stay”, but where you LIVE. Here’s what goes into that determination:
Where you are registered to vote
Where you have your driver license (both state of issue and address)
Where you have a homestead property tax exemption
Whether you were in that location for more than 183 days of that tax year
Here’s what doesn’t have much to do with that determination:
Where you say your tax home is on your tax return
Your tax home is important, as it determines whether your income is taxable in other states you may have earned in. If, say, you live in Texas, but worked temporarily in California, your California income is taxable as a non-resident, but money you earned elsewhere is not taxable in California.
If your tax home is in California, then 100% of your income, wherever it was earned, is reportable and taxable in California.
So, if your tax home is Texas and REMAINS Texas, and you travel to work in California for fewer than 183 days in a year, you will have to file a California non-resident tax return for the income you earned in California.
What if I don’t file a tax return for a state I don’t live in?
Not a great idea. You should file non-resident returns for every state in which you earned money, even if it wasn’t reported on a 1099 or W-2.
Here’s why - the states get information directly from the IRS, so they know what your total income was for each year. If they have detected that you were earning in their state, the local tax authorities are expecting a tax return from you.
If you don’t file, many states will just assess state income tax on your TOTAL income based on what they get from the IRS and then start collection proceedings.
The cost to respond to those collection proceedings, to get the tax returns on file and corrected, not to mention the time and stress are expensive.
Much of the time, you’ll get a refund from a state you worked a short time in, or will pay nothing if you had a short, temporary gig in another state.
States with no income tax
If you find yourself moved to a state with no income tax, you may be feeling like dancing - but, you need to be careful:
Did you keep the house you were living in back home? Are you renting it out, or does family still live in it?
Did you move the kids with you?
Did you change your driver license to the new state?
Did you register to vote in the new state?
Did you register your vehicles in the new state and get auto insurance in the new state?
If you left a connection with your home state, the answer to any one of these questions could have your home state determine that ALL of your earned income was taxable in your home state. Even if your intention was to fully and completely relocate, you could have this to deal with if you’re not thorough with the little administrative details.
Did you just move to Texas?
We will help you navigate what, where and how to get all of your tax home residence established in Texas so you get the full benefit of our lack of personal income tax. We can also help you with questions about moving expense, part-year and non-resident taxes in states that do have an income tax, and anything else that will help you ease into your new, Texas living.