State tax filing

Opus 17 · ‎March 30, 2021

@chickentax56 wrote:

Thank you! That definitely clarifies things. I still have a couple more specific questions.

Is the income earned from my WA based employer while in MO as a non-resident considered MO sourced then?

Based on the answer to #1, If I do not have any MO sourced income while living in MO as a non-resident, do I still need to file a part year non-resident return? It seems like MO would certainly want some form of income tax for that period, but the non resident return seems to be more catered for working for a company in state A that collects income tax while residing in State B that does or does not collect state income tax.

Can we call ourselves non residents of MO and residents of WA from March through September if we were living in MO working remotely? Or do we need to consider ourselves MO residents for the whole year? I am still a little confused as to what depends purely on where you are and what is contingent on the active steps to change your domicile that you mentioned.

How specific do we need to be when determining MO sourced income? For things like capital gains, does it matter when we sell stock or do we just look at the yearly totals and split between time as a MO resident and WA resident? For things like cash bonuses, does it matter where you are for the pay period where you get the bonus or is that just split across the whole year?

1. Income paid to you for performing work while temporarily living in Missouri is considered Missouri income, no matter where the employer is headquartered. It is also considered Washington income, if your domicile is Washington and you are only temporarily working in MO. However, since WA does not have a personal income tax, we don't have to worry about that half the equation.

Income that is not from working in Missouri, but which is paid when you are temporarily living in Missouri (such as a rental house back in Washington, or a brokerage account) is not Missouri income because there is no nexus between the income and the state.

I may need to explain further. For a state to tax your income, there must be a nexus between the state and the income. If you are a resident of the state (where your domicile or permanent home is located) that automatically creates a nexus between all your world-wide income and your home state. If you are a non-resident, then there is no automatic nexus, but one way to create a nexus is to work out of an office or home office located in the temporary state. For example, imagine a retired couple touring the country in an RV. Their pensions are taxed in their home state, but not in the states they visit, no matter how long the visit or where they are when they get their deposits or checks, because there is no nexus between the income and the states they visit. But, then suppose they win a lottery jackpot while driving through a state. That's a nexus, so the jackpot is taxable in the state where they won it (no matter where they are living when the jackpot is actually paid) plus the income is taxable in their home state, because all their income is always taxable in their home state. Hope this clarifies it enough.

2. A non-resident return is required when you are working in a state that is not your permanent residence, and reports income earned in that state, regardless of the tax situation of your home state. For example, if you work for company 1 while living temporarily in state A, but also receive income from a brokerage account, you owe income tax to state A for your wages from company 1, and you owe income tax in your home state for both your wages and your investments.

3. Because WA does not have a state income tax, they won't care if you consider yourselves MO residents starting in March or September. It would be easier for you to file that way, as a part-year WA resident (Jan-March, no income tax) and a part-year MO resident (from March to the end of the year). But you might pay more tax if you have other income that is not sourced from Missouri, that could be tax-free if you consider it Washington income only.

If your original home state had an income tax, they might be more aggressive about determining where your permanent residence was, because if your permanent residence was still in your home state until September, they would get a piece of the action. As I said before, changing your domicile requires establishing a new domicile and also taking steps to abandon the previous domicile (such as surrendering your lease), and some states (e.g. CA, NY, NJ) can be very aggressive about calling you a state resident for as long as possible so they get a piece of your taxes. Since WA does not have a state income tax, they won't care when you declare yourself a permanent resident of Missouri.

4. Income is realized when it is actually paid. For capital gains, the income occurs on the date you sell the stock. For an employment bonus, the income occurs when the bonus was paid, and not when it was "earned".

If you are resident of state A when the income is paid, then it is taxable income in state A, no matter what the source is. If you are temporarily living in state A and not a resident, then income is not state A income if it does not have a "nexus" with state A.

The point of all of this is of course: if you determine you did not become a Missouri resident until sometime in September 2020, then any non-MO income you received before you became a resident is not taxable income on your MO return. That might be from capital gains from a broker account, and you may need to look at the account statements carefully so you can allocate the income to MO (income that occurred after your move became permanent). The only bonuses that would not be MO income would be bonuses paid before the initial move in March.

Now, if you had a large capital gain in June, and you decide this is not reportable on your MO tax return because you were a non-resident at the time, and MO gets wind, they could come after you on the argument that you became MO residents in March, not September. Your defense might be that you always intended the move to be temporary, and the move did not become permanent until it became clear that COVID was a long term problem or your employer made certain decisions, and so your move was reasonably considered temporary as of June. Then you would have to see what the state says and proceed from there.