State Income Tax Residency Issues Related to the COVID-19 Migration – Is It Time for the Snowbirds to Fly Home?
Two much talked about consequences of the COVID-19 pandemic are that millions of people are now working remotely, and a very large number of people are relocating to states with lower infection rates. Many who are able to work remotely from anywhere (telecommute) are fleeing densely populated states for more rural settings, and Maine and New Hampshire are two states that have seen a substantial influx of people. Those migrating to the Northeast include individuals who intend to stay temporarily, and others who are permanently relocating here. In addition, some with summer homes in Maine or New Hampshire – so-called snowbirds – are spending more time in their second homes than normal.
Whether one is relocating temporarily or permanently, or staying in a summer home for an extended period during 2020, there are state income tax residency and return filing issues to consider. This article will provide a brief overview of some of these issues.
Income Tax Residency Considerations:
Many states, including Maine, have fairly well defined rules related to the establishment of residency for income tax purposes. In Maine, a full-year resident is 1) an individual who was domiciled in the state for the entire year, or 2) an individual who maintained a “permanent place of abode” in Maine for the entire year and spent a total of more than 183 days in Maine (a “statutory resident”).
A “permanent place of abode” in Maine is a house, apartment, dwelling place or other residence that an individual maintains as his or her home, whether or not he or she owns it. The term generally does not include a seasonal camp or cottage used only for vacations (these typically are not winterized, and therefore it is unlikely they could be used year-round), a hotel or motel room, or a dormitory room used by a student during the school year.
Those who purchase second homes in Maine, or who already have vacation homes here, need to be cognizant of the residency rules. Most second homes owned by “snowbirds” would meet the definition of a “permanent place of abode” and therefore if the owners spend more than 183 days in Maine during 2020, they will be Maine residents for income tax purposes, and all of their income earned during 2020 will be subject to Maine income tax. If they are domiciled in a state that has an income tax, they may also be taxed on 100% of their income in that state, and could be double-taxed on some income. Those who have spent the summer here as they normally would, and are contemplating staying a little longer, should evaluate how much time they’ve spent here, as staying just a few extra days could have expensive tax consequences.
With regards to Maine, the question has arisen as to whether there will be an exception to the statutory residency test (maintaining a permanent place of abode and being in Maine for more than 183 days) if an individual with a second home in Maine spends more than 183 days in the state due to COVID-19. Maine addresses this in Question 9 on its COVID-19 FAQ page (link found here), and the answer is “No”.
New Hampshire doesn’t tax wages, but does tax interest and dividends, and self-employment income. The state’s residency requirements are not as clearly defined as Maine’s, but those who have relocated to New Hampshire on more than a temporary basis should be aware of the state’s rules, as tax liabilities could exist.
Nonresident Income Tax Filing Requirements:
In most states that impose an individual income tax, wages earned while working within that state will be taxed by that state. Any business income earned by a self-employed individual will be treated similarly. Therefore, individuals temporarily residing in and telecommuting from a state outside of their state of residence should keep track of the time spent there, and the wages or business income earned. It is likely that the individual will be required to file a nonresident income tax return. In most instances, the individual will get a credit for the tax paid to Maine (or another state from which he is telecommuting) on his resident state income tax return. This is not always the case. There could be instances in which the individual is double-taxed on some income.
States’ individual income tax and residency rules vary, as does the complexity of their tax systems. There is no “one size fits all” answer for individuals’ varying circumstances. Those who are working remotely, and/or find themselves spending more time in their second home, should familiarize themselves with the state’s tax rules, and work closely with their tax advisors to avoid an unpleasant surprise in April 2021.
For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.