Most individuals are familiar with the need to file a state income tax return in their home state—typically their state of residency. However, here are some common circumstances where additional state filings may be required or desired.
You Own a Rental Property in Another State
Owning a rental property gives rise to the need to file an income tax return in the state that’s home to the rental property. There are several factors to consider before actually filing a tax return in the state. First, consider whether you show taxable income or loss on the property. Reporting losses means no income tax is due and there’s generally little risk to not filing a return. If you show taxable income for the activity, you’re likely required to file once you exceed the filing thresholds in a particular state. For example, some states don’t have a filing requirement if your income is less than the personal exemption. Second, consider whether the state allows you to establish future losses. Even if generating a loss, you may want to report these to establish a loss carryforward that could reduce gain on a future disposition. Lastly, consider whether to start the statute of limitations. Not filing a return means the state can audit you for an indefinite period of time. Filing a return means the state only can audit a limited number of historical years. Sometimes not having to worry about records, documentation and a state auditor is worth the time and expense of filing.
You Own a Vacation Home
Having a vacation home itself doesn’t require filing a personal income tax return in that state. However, if you’re a person who’s always working—even while on vacation—you may be crossing a line that triggers an income tax filing requirement in the state. This is a fine line that depends on how much time you spend at your vacation home, how much you’re working and earning and how the income is derived. If you earn your income as an employee, you’re probably at little to no risk for occasionally checking your email when you’re on vacation. However, if you own a business and work from your vacation home regularly, you may need to source your income to multiple states.
You Travel for Work
The need to file an income tax return in multiple states hinges on whether your employer is already withholding for you in the states where you frequently travel. This depends on travel frequency and whether you have recurring visits to the same state. If you’re assigned long term outside your home state, you may need to file. Before you start filing tax returns in other states, ask your employer about its multistate withholding policy. Also, check your W-2 for multistate withholding that may have been done during the year, and be sure to provide all paperwork to your tax advisor.
You Own an Interest in a Publicly Traded Partnership (PTP)
PTPs—often master limited partnerships—will send you a Form K-1 reporting federal tax information. Many include several pages of supplemental materials, including state reporting information. For most individuals, the income derived from PTP investments is minimal and doesn’t give rise to additional filing requirements. Typically, investment income is sourced to the state of the individual’s residency; however, be sure to provide all supplemental schedules to your tax advisor to assist in making this determination.
You Have Gambling or Lottery Winnings
Luckily, some states don’t impose a state income tax, e.g., Nevada, so there’s no need to worry about a filing requirement. However, if you have sufficient winnings—congratulations! Check your tax reporting stubs for state withholding; if your winnings exceed certain minimums, you may need to file in the state where you won.
A frequent question taxpayers have on filing in multiple states is, “Does this mean I have to pay tax to multiple states?” Theoretically, no. Most states have a mechanism whereby a resident paying income tax to another state can claim a credit for the taxes paid. This credit is a dollar-for-dollar reduction of your home state tax liability, subject to some limitations. The primary limitation is the rate that applies. For example, if your home state has a rate of 5 percent, but you paid tax to another state at 7 percent, your credit would be limited to 5 percent instead of 7 percent. Due to intricacies in how the exact credits are calculated, you may have slight variations from a true dollar-to-dollar credit.
As with many tax decisions, there are intangible variables at stake. Consider the cost of filing, additional complexities added to your resident state return and risks or exposure that come with not filing a return. As with many state laws, the answer in one state isn’t necessarily the answer in another.
Contact your trusted BKD advisor with questions or for more information.