How does moving out of state affect your taxes?
The pandemic changed the employment landscape dramatically. Many workers shifted to working remotely, either temporarily, or permanently. For permanent remote workers, this offers an opportunity to change their life.
Remote workers are not tied down to a corporate office. They are free to change their environment and even move out of state to be closer to family, for a change of scenery, or to a location that has a lower cost of living.
An out-of-state move can have a significant financial impact and can change the way you earn money. But, it also complicates things. Each of the United States can have different income tax rates, property tax rates, costs of living, and even employment laws.
In this blog series, we’ll review financial and tax considerations for people who live in a different state than where their employer is located. Today, we’ll just touch on the basics of filing state taxes when you live and work in a state different from where your employer is headquartered.
Where you live and work remotely vs company location
So what determines the jurisdiction that you are taxed under? Do you pay taxes based on your address? Does your company’s address dictate where you pay taxes? Or does the location where the work is physically done matter?
The general rule is that you are taxed based on where you are when you perform the work and where the income is earned.
State tax filing requirements
Will I get double taxed if I move to a different state from my employer’s headquarters?
Federal law prevents two states from taxing the same income. The year you move from one state to another, you will file state taxes with both states, but only owe taxes for when you were in the respective state.
You are required to file a tax return for any state where you have income. In most cases, once you’re in one state for the entire year, working remotely and set up in the payroll system correctly, you do not need to file any state returns other than the one in which you live/work.
Moving Out of State Example
Charlotte lived in California for the full year in 2020 and worked for a law firm located in California. She transitioned to working from home at the start of the pandemic and continued to work remotely in her CA home for the remainder of the year. Naturally, she filed and paid taxes to the state of California.
In 2021, Charlotte’s employer, the law firm, announced they were making their remote-work option permanent, allowing Charlotte to move to Colorado in June 2021 to be closer to family. She gave her employer her new address to update the payroll system accordingly. When she prepared her 2021 taxes, she had to file with both California and Colorado.
Charlotte continued working for the California-based law firm in 2022. As a resident of Colorado for the full year, and her payroll system set up correctly, Charlotte will only need to file state taxes with Colorado.
Important note: Your employer must receive your new address to update the payroll system. If your employer does not update your address and taxes are withheld from the wrong state in a subsequent tax year, you may need to file a Non-Resident return in that state to get the withholdings back.
Bottom Line
Tax law is complex and ever-changing. While these are the general rules of thumb, it’s best to consult a tax expert familiar with state tax laws for where you live and where your employer is headquartered.
In upcoming editions in this series for people who live and work in a different state than their employer, we’ll look at topics like state income tax, state property tax, and which states have the highest and lowest cost of living.
