Ever thought about becoming a digital nomad? Or maybe moving to a new state mid-year? Earning income in multiple states can make your taxes a little more complicated. In this episode Daniel, Kat, and Lauren dive into the nitty gritty of multi-state tax filing, and answer some of your questions like: How do you know how much you’ll owe in a given state if you move mid-year?
The views, information or opinions expressed during the Friends with Tax Benefits podcast series are solely those of the individuals involved and do not represent those of Intuit, TurboTax or any of its brands. The primary purpose of this podcast series is to educate and inform. This podcast series does not constitute financial, legal or other professional advice or services.
Full Episode Transcript:
Daniel: Hello, and welcome back to another episode of Friends With Tax Benefits with my two friends, Lauren and Kat.
Kat: Hi. Nice to see you.
Daniel: I want to shake it up a little bit this week. I want you to take a minute and I want you to think of the craziest efforts you went through to raise some cash fast, and I’m going to give you some examples. The two things I did, the most desperate cash raising efforts I ever tried outside of terrible jobs, detasseling corn or polishing metal in a factory for 10 hours a day.
When I was in college, I needed to keep my CD collection growing. And so I used to donate plasma twice a week and 20 bucks, the first donation, 15 the second each week. And then when we were pregnant with our first child, my wife wanted a doula and that was $500. And I’m like, “Goodness, we don’t have $500.” So I sold all my collectible seven inch records that I’d been collecting for forever. Surprisingly made a ton of money and then she needed a C-section. So we didn’t need a doula anyways. And so all that money went into the general fund. So, plasma and record sales were what I did. Did you two ever do anything crazy to raise some cash fast?
Kat: Well, first of all, Daniel, doula’s now, you said it was $500, tack on at least another zero on that end of what is running nowadays for a doula on the low end. Okay. I can’t say that personally, for my own self, that I did some crazy things to raise funds, but I was in a sorority and we used to have to raise money for our nonprofit, philanthropic efforts or whatever. And we had to get creative because you couldn’t keep doing the same things all the time. And I think one of the most, I felt, vulnerable moments was, I was selling and now to think about it… I was like, “What?” But we were selling cupcakes for donations. So whatever somebody wanted to give a cupcake for. Honestly, the best people who were buying the cupcakes were people who were probably not interested in the cupcakes at all. But-
Daniel: Exactly, yeah.
Kat: …were just trying to have a moment to chat. I know I could buy a cupcake. But yes, now I am a sucker if I see kids or youth selling anything, even if I don’t want it, I’m reliable to just give them some money if I have cash on hand.
Daniel: Keep the cupcake. What about you, Lauren?
Lauren: I love the plasma reference. I had a lot of friends in college who also sold plasma. I thought about selling my eggs.
Kat: I think most women have, when you see how much they’re going for Lauren, you’re like, “Dang, really.”
Lauren: I mean, I’m college educated! I didn’t go through with it, but I definitely thought about it pretty seriously. So the only thing I’ve really done to get cash really quickly like that, I did drive an Uber as a way to make some extra money for a trip I was taking with my sister to Turkey. So I just wanted some extra spending money and thought, let me just Uber for a while, see what it’s like, get some extra money. So that was really an experience.
Daniel: Well, our wonderful producers recommended a show to me called Broad City. And in this show, Ilana and Abbi wanted to see Lil Wayne and they didn’t have enough money. And so they were hustling all over the city and they’re in New York City and they wouldn’t surprise me if they had to cross state lines, but they were filching some office supplies and returning it to the store from their office. And all they got is store credit. And they’re like, “Dang it, what am I going to do at this store credit?” And playing the buckets and the street and trying to raise some dollars, but that is something I definitely would’ve done in college to play those buckets.
And they made $0 doing that because a break dancer came and stole the show and that person got all the money. And then finally in the climax of the episode, they cleaned the apartment of a man who fetishized wearing a diaper and acting like a baby, but he only spoke baby talk. So he couldn’t actually pay them. So in these desperate attempts to raise money for Young Wheezy, it reminded me of my college life of hustling all over the place. And in fact trying to maintain the scrappy lifestyle we were and so.
Kat: I have not seen Broad City, but I think we should clarify that if they wanted to see Lil Wayne and Young Wheezy are not the same.
Daniel: No. Well as our friends, Ilana and Abbi have reminded us that we’ve all done some pretty wild and desperate things to make ends meet, such as getting in their car and driving to new states and finding new opportunities where they had never, never thought there were opportunities before in a digital or what do we call it? Analog nomadic life. And let’s turn it over to you Kat and learn from you about multi-state, moving around and earning money and some ways that we may not have thought of and what we need to think about tax implication wise or just smart finance wise.
Kat: As it pertains to multi-state income, my biggest piece of advice is always going to be to seek an experienced tax professional because simply put, it’s just not as straightforward and cut dry. So if you’re moving around or if you’re earning income in different places or you’ve decided to pack up and maybe rent out your place and you’re living someplace else, and you’re really doing your own version of the digital nomad life, you could find yourself falling into a place where if you tried to do your taxes yourself and I’ve seen it, you accidentally filed the wrong form and you’re getting taxed twice or you misfiled it and you thought everything was great because the years went by and nobody’s told you anything. And then you start getting mail that you’re getting audited, that you misreported income. And I say to go to an experienced tax professional, because you might go to somebody and they’re used to doing taxes in the state that you’re from, but they’re not used to somebody who’s been moving around a lot or has income in these different states.
And some states even have a reciprocity agreement. So that’s a fancy way of saying they have a mutual agreement with themselves between the two states that allow residents from one state to request an exemption from tax withholding in a reciprocal or in another state that they have that agreement with. So that’s a way to help folks avoid possible double taxation. But then you’ve got other states where they’re like, “No, technically I know you were living someplace else for a little bit, but you owe us money on all that income that was earned.” So it’s going to be really important to know how the income is handled for the states that you’re moving around in. I would even say, if you find yourself in recent times like, “Okay, well I can work a hundred percent remote. My company is allowing us to move wherever.”
Maybe even talk to a tax professional ahead of time, because what you might think might be advantageous or a seller for a state that you’re like, “Yeah, I’m going to move there.” You might find yourself moving from a state. I live in Florida where we don’t pay state income tax. And if I went to another state where the houses might be a little bit more affordable, I might find myself having to pay state income tax now. And that’s not something that I was accustomed to. So if you are living hashtag van life and you’re going from state to state, where’s your van registered in. That’s a good indication that you might have some residency requirements and state filing required for that state. Because those are one of those things. If you get audited and they’re like, “Okay, well let’s determine where you are a resident.” They might ask you something like, “Hey, where are you registered to vote? Where is your car registered? Where do you see your dentist?” They’ll use all those things to determine what your home state is even if you don’t think you have a home state.
Daniel: You’re saying, or my restatement is, “Hey, I’m moving to Texas because the taxes are cheaper than where I live.” I think that’s the case. And I drive my gorgeous minivan there and say, “I’m going to do hashtag minivan life out of Texas.” But if I don’t change the registration, I, for all intents and purposes, even if I sub out my house for all intents and purposes, I still live in California. Was that kind of what you’re saying?
Kat: Yeah. California could put you on the hook. “Well, hey, your card’s registered out of here. You’ve paid registration fees and you’ve got a tag and likely a driver’s license from here as well.” So those are things that typically attach you to a state. If you had the intention to make Texas your new home, you should change your driver’s license. Typically that’s a rule in the state that once you’re there within 10 days, you’ve have a new place, you need to reestablish that. So even though you’ve maybe not gotten caught for having a driver’s license or pulled over for being out-of-state plate, those are things that could consider you a resident of those states. And I know folks have even gotten, hey, let’s take it outside of the United States for a moment, like I’m completely off the grid.
If I’m tuned in, when my team is tuned in, then that’s fine. So if you decide to move overseas, you want to move someplace outside of the US. You’re technically still required to file a tax return based on your worldwide income as a US citizen or a US resident, green card holder, you are required to file a tax return. Now that doesn’t necessarily mean that you’re going to have to pay taxes on all of the money in your worldwide income. There are some exemptions or deductions that you may qualify for up to a certain degree, but you are required to report it. So you are required to file a tax return, at least at the federal level. Even still, maybe you have an address of record with your employer in the United States that they’re sending all your mail to and where you might receive your W2 in the residency audit, those things could be used to determine, you may be on the hook more than you think.
Lauren: Yeah. So I actually have had to file multi-state income several times. I haven’t lived the hashtag van life or been a digital nomad, though I’ve thought about it, especially in the past couple of years since we’ve been working remotely. But after college I went to college in Florida and then moved to Georgia and I’ll tell you, it was a bit of a challenge moving from a state with no state income tax. I don’t think I realized the luxury of it. I remember my first paycheck, there’s so much always taken out in taxes and you’re like, “what? I was expecting this amount.” And then it’s way less.
And then you move to a state with income tax and it’s even less than before. So that was pretty painful. And then a couple years ago I moved from Georgia to California and the income tax, I think in California’s even higher. So that’s been quite a challenging reality check for me. So if I were to move again, I would definitely make sure that I planned ahead and understood what the differences would be in state income tax, to make sure that I could budget accordingly, as I planned ahead for the move. It’s not something I’d fully factored in when I made the leap to come from Atlanta to San Diego.
Daniel: I know people who have had, we’ll just call it a San Diego salary. And they said, “Hey, this is too expensive.” Or it’s San Francisco salary. And they said, “This is too expensive. And I want to work remotely.” And they move to Wyoming, but their companies have said, “Well, that’s cool. And I’m going to adjust your salary down to what it would be for a Wyoming salary.” And on the flip side, what I’ve seen, there are companies that have multiple offices all over the country. And if they live for example, in a cheaper locale. And they said, “I’d really like to live in the Bay or I’d like to live in San Diego or Seattle.” If it’s an optional move and they just want to move there, the company says, “You can work just fine in that cheaper place.”
And so they will adjust you down if you move to a cheaper place, but they won’t adjust you up if there’s no compelling reason why you need to be there. And so that’s something to really think about is don’t assume that whatever business you’re working for is just going to bend to the whims of your moving because it’s a business. And so they’re looking to be as conscientious about salaries as possible. There’s some interesting reciprocity challenges for people when they move to a new state. My wife is a social worker. She’s a licensed credentialed social worker. And so she can do therapy in Arizona where we used to live, but in California it would be a tremendous cash outlay and all sorts of red tapes. She would’ve to go through in order to do therapy here in California.
And similarly, I have a friend who, his wife was a nail tech actually in Florida, they moved to California and there was a year of classes to do nails in California, just through red tape. And so when you think about moving, I mean, all of these things that we’ve been talking about, which are cost of living or taxes, really research what sort of credentialing or reciprocity your new state, even if you’re a teacher there, you may have to go get re-certified in that state. So really think about that because you may not be able to work while you’re working to get that credential in that new state.
Kat: And I like that you said teacher as well, Daniel as an example, because I feel like sometimes the folks that think that they’re more on the hook for maybe needing to figure out their license in a new state are more technical jobs, but it’s a little bit of both. You’ll see CPAs, lawyers, plumbers, sometimes these states have made it a requirement that you might have to have experience under somebody that’s licensed in that state for a certain amount of time. Or like you said, in the example of the nail tech, go through almost a year of training, which is probably comparable to the amount of training she had to do initially in Florida to start from zero, even though she has years of experience. So you might be able to make more money doing your same job in another place, but how will your license translate over or how will your profession?
Lauren: This came up for a friend of mine. She lived abroad for over a decade, teaching English overseas. And then she moved back to South Carolina and she’d applied to teach locally. And they essentially said, you need to have experience teaching in South Carolina to be paid at the level of 10 years of experience. So essentially these years of working abroad don’t even count at all here. And we’re starting you off at an entry level salary, which was significantly lower than she was anticipating.
Daniel: All right, Kat. So let me tee up a few questions for you and see if you can help our nomads or our travelers or our movers navigate their finances. Ready?
Kat: Yeah, let’s hear it.
Daniel: All right. If I work remotely 100%, which state is my best home base from a tax perspective?
Kat: Your home base, as it pertains to your taxes is going to be considered the state that you reside in or are domiciled in. So even if your work is a hundred percent remote, it’s likely that you’re going to spend a majority of the year in a set place. So when I say majority, I literally mean more than half of the year. So more than 183 days in that year is typically the criteria that’s used now-
Daniel: Roughly 183 days. I like that, Kat.
Kat: If you chop the 365 and half, that’s going to put you over that halfway mark. Now, if you’re considering moving because your job is now fully remote and you can be wherever, you might want to consider a state that doesn’t collect state income tax as your next home or place that you’re going to reside in. And because that might be advantageous to you to not have to pay state income tax. And there are a handful of states, Florida, one of them that does not make you pay state income tax on your earnings. So that might be something you want to consider if you’re thinking of picking up and moving someplace else.
Daniel: Now Kat, the next question has been up voted seven million times and is, what is the definition of domicile?
Kat: So domicile, you’ll see it a lot sometimes in legal language or tax law, but it’s used interchangeably with residence. So it’s a formal way of saying where you treat your permanent home to be or where you live, where you have a substantial connection with. So they use that to sometimes help folks who are moving around a bit to figure out, where do you have roots and maybe you own property in there. Maybe you have a business, maybe you have financial things tied back to that area. So that might be where you’re considered to be domiciled or a resident of that area more commonly.
Daniel: So if I want to be fancy, I can also throw that out.
Kat: Yeah, definitely.
Daniel: All right. I gotta clean this domicile after this show, full disclosure. Okay. Next question. What if I own an online business, but my warehouse is operated out of state. Is it where I reside? Where is my domicile? Or is it where my warehouse is?
Kat: Where your business is registered likely. So it’s possible that you could be a business owner and you’re a resident of New York, but you have a business built out anywhere. You’re going to have a separate business tax return. So aside from your personal tax return, it’s likely that your business is also going to have its own separate tax return. Now, if you’re a smaller business and it’s a pass through entity, so it’s going through your own personal tax return, it really depends on how your business was established when you created it. Was it a partnership? Is it a corporation? Each of them have their own appropriate filing forms, but generally speaking, your business has its own tax return separate from your personal income tax return. So that business will have to file a federal tax return with the IRS and then likely another business tax return with their state.
Daniel: All right, last one. And this is something that applied to me this past year. How do you know how much you’ll owe in a given state if you move midyear? Which is what we did last year.
Kat: In that situation, it’s likely that you’re going to be considered a part year resident in the state that you’re leaving in and maybe a part year resident in the state that you’re going to and the tax return is likely going to have you breaking it down to, I lived 146 days here and then I live the rest of the year here. And then the money that you earned is split. Or maybe you had a job in one state and that W2 ended there and then you started a new W2 in a new state, and then that income was there. So you might essentially be allocating which money was earned where. You want to make sure that you don’t accidentally file a full year return for two states. And then in essence are getting taxed twice.
And then there are some states that have an agreement with one another, that if you paid taxes in this state, then there’s some exemptions or deductions that you might qualify for on the other state’s tax return. So having somebody that is familiar with it is going to be… The type of income that you have, but also the states that you might have triggered a filing requirement for because you want to make sure that it’s divided appropriately. So it’s not quite a simple, straightforward answer, but definitely contact a professional who has experience working with those various states to make sure you’re filing the right type of tax form.
Lauren: And it used to be that you could deduct moving expenses but didn’t that law change a couple years ago?
Kat: You’re right Lauren, you used to be able to deduct some of the expenses that you had as an employee that were not reimbursed, but with tax reform in recent years, that’s changed. So for most companies, the way they handle relocating is you get some type of moving incentive or bonus, but then it comes back to you and you end up having to pay taxes on it.
Daniel: Well as always, this is Friends With Tax Benefits and I’m here with my good friends who have tax smarts, Lauren and Kat. Thank you so much for spending time with us today. You too, and all the listeners and we look forward to seeing you for our final episode and be sure to check this out on Spotify, Apple Podcasts and all those other good places where you can listen to smart people like Lauren and Kat.
Kat: And you too, Daniel.
Lauren: Thanks Daniel. Bye all.