The Domestic Expatriates – The Tax Implications of Working in One State While Residing in Another

The Domestic Expatriates – The Tax Implications of Working in One State While Residing in Another

I bolted awake the other night, a sharp thought slicing my cloudy mind like a hot whip: where the heck am I?

Expatriates of all stripes can relate. No matter how long you reside in a foreign land, love its rich food, new climate and manners, life gets disorienting. Simple things can knock you for a loop; this time, the chirping gecko in my bedroom curtain did the trick.

As my eyes got used to the dark, I relaxed – the familiar mango trees swayed outside; inside, the ceiling fan whirred and the $2 alarm clock raucously tick-tocked. Safe in my teakwood abode, which offers a pool I never swim in and a washing machine complete with a treefrog who ever sits there and goggles, I returned to life, if not truly home.

My true home: where is it, now? I mean my domicile, the US state where I officially exist – at least to the grasping – pardon – responsible authorities who maintain my driver’s license, voter registration and yes, at last to our topic: state tax records.

Living overseas, I don’t worry so much about state taxes. Yet I’m thinking today about a related new breed; I call them domestic expatriates. The pandemic brought these folks into the limelight and swelled out their ranks. They reside in one state, work in another. Their employer can be in a neighboring state or an e-jaunt of thousands of miles.

This arrangement, old as bay rum, is now touted as the ‘new wave’ of working. Talk to these ‘domepats’, and they revel in remote working’s blessings, but note its unique set of problems – in particular, this matter of taxes.

Live here, earn there – who gets the taxes? It depends where you live, but let’s consider some obvious candidates: New York and New Jersey. Locals there, millions of them, have been dealing with this jumble for ages. The hurdles are higher or lower in other US regions, but the two ‘News’ are good proxies.

Mind you, in tax terms, some states rate better than others; consider Alaska and Florida, which have no income tax at all. But what if you live in FL, work there remotely, with most of your clients in high-tax New York? Will NY demand its share, or can you tell those damn Yankees to just let you be?

Oh yes, they want it. New York has always been a hungry revenuer, and it’s particularly aggressive today. Most states are no different – apart from the tax-free few, which have other income sources, like oil-rich Alaska – they’re desperate for tax-take. You can move far away and still not slip their grasp.

Let’s say you work in Manhattan (I recommend the all-you-can-eat Indian buffets; easy walking distance from Wall Street) and live in New Jersey, terra incognita to me, but a wise penny-pincher’s paradise, I’m told. It’s a quick sub-river commute, and Newark and company are pretty shiny these days, so it’s a sensible strategy.

Here’s what New Jerseyite domestic expats do annually: they file a New York Nonresident Income Tax return (IT-203) and then a New Jersey Resident Income Tax Return (NJ-1040). New York state taxes are deducted from their paychecks; NJ provides a tax credit to cover most of that amount, if not quite all. There’s a maximum percentage one can receive, but full-on double-state taxation is dodged.

This system works only for income tax. Capital gains are taxed differently, as are other types of non-work income, like dividends and interest. In these cases, you’re taxed at the source: if you sell a New Jersey condo, you owe Trenton the tax on any gain; if you sell your hot dog stand in Brooklyn, Albany wants its piece of the pie – in cash, not in half-smokes.

What about the people who shuttle around? Say you spend several months of the year in California, the remainder in Arizona or Texas. Get acquainted with the 183-day rule, which most states and indeed countries (like the mysterious locale where I’m typing, with my singing gecko companion) apply to determine residency for tax purposes. Roamers, keep track: leases, utility bills, even humble retail receipts will be useful to support your residency case if an out-of-state taxman comes calling.

As a true expatriate, by spending at least 183 days right where I am, I qualify for advantageous US federal tax treatment. The rules aren’t as clear-cut as they seem: the IRS makes rather a mockery of simplicity by considering days from the two previous years, in addition to the current ‘taxable’ year, before allowing the ‘treatment’.

I keep meticulous records – on paper, not digital, we’re dealing with dinosaurs – to argue my case. In three decades of living abroad, I’ve faced queries so many times, had to prove to both US and foreign officials: ‘Yes, this is me; no, I live here, not there’. So if you’re planning a move overseas and dreaming of tax breaks, pack your ‘proof’ documents with the special cookies and AA batteries (you’ll need those) in your suitcase. Somewhere, someday, some official will ask for them – and it won’t be a humble request.

Uncle Sam is cantankerous, but the states have historically been reasonable, with many employing reciprocity agreements to smooth multi-state tax issues. But the times are changing. The pandemic was expensive and new revenue sources are being aggressively sought. Yesterday’s tolerant state may turn tyrannical before the next April 15.

If you’ve been successfully straddling state borders, don’t be complacent: watch out for changes. If you’re thinking about moving to a new state or simply working across state borders, take care and consult with a tax attorney without fail.

Online advisors tend to piffle this advice, filing it in the ‘maybe consider’ category, but I rate it essential. Never toy with taxes, especially in this era of hot tax pursuit.

Like the ‘domestic expats’ themselves, this is nothing so new. Way back in 1990, I was eating a kebab in my London flat in Parson’s Green. My US mail had arrived; while leafing through it, one letter caught my eye via the richly embossed Indiana State logo. Greasy fingers enquired:

“YOU ARE UNDER ARREST. Proceed immediately to the Main Courthouse, Indianapolis” – and they kindly provided the address, my arresting officer’s name and, I’m not kidding now – the number of my detention cell. Date and time of surrender at my earliest discretion.

Oi, so many speeding tickets; I thought that pretending to forget them would cancel them out. All this fuss over $450 or so, doubled for non-payment every four weeks, augmented by ominous ‘supplementary’ charges, with a preliminary court cost estimate of… Gee, it adds up. It’s a wonder they didn’t send a plane for me.

See, the Midwestern states were strapped in those days, at war with Washington for highway funds. They needed all they could rake; highway patrol cops don’t work for free.

I settled ‘out of court’ by not going, but if you’re planning a ride over state borders or somewhere even more grand, don’t follow my poor example. Go safely and sensibly on a path mapped out by legal experts. Sitting here today, far over the waves, I ponder those hungry tax collectors in my domicile and wonder: how long will these shores remain free?

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