2023 Year End Bonus if Moving States During 2023

[LAtoParkCity]

Hi, I am planning to officially move from CA to UT in mid-October 2023. My employer will change my place of residence accordingly. My year end bonus is payable in mid-December 2023 (we have a fiscal year end of Sept 30th) and my bonus will likely be 3x as large as my salary. My bonus is based on performance from Oct 2022 (the beginning of FY 2023) through Sept 2023 but I won't be informed of amount or receive such payment until later in calendar Q4 2023. 

Is it risky for me to claim Utah residency for this bonus? Is it likely CA will pursue me? There is an 8% delta between the UT state tax income rate of 4.95% and the highest tier in CA.

Any advice would be greatly appreciated.

[tagteam]

I'll page @Critter-3 

[TomD8 · Accepted solution]

It works like this:

Your bonus will be taxable by California regardless of your state of residence at the time you receive it.  That's because it represents compensation for services you performed in California, thus making it "California-source" income.  CA can tax non-residents on California-source income.

If you receive it after you become a Utah resident, it will also be taxable by Utah.  Utah residents are taxed on all their income, regardless of its source.  However, in this situation Utah will grant you a credit for taxes paid to California on income that is taxed by both states.  Thus in actuality you won't be double-taxed.

Residency for state tax purposes isn't something you "claim".  It's determined by state law.  Utah will consider you a resident for tax purposes as soon as you begin living in Utah with the purpose of making it your new permanent home - your domicile in tax terminology.  See "Test 3" in this Utah tax reference:

https://incometax.utah.gov/instructions/utah-domicile

You can only have one domicile at a time.  Conversely, you become a non-resident of California when you abandon your domicile in California and establish it in a new state.  

If you move in 2023, for tax year 2023 you will file a part-year resident tax return in each of the two states.  TurboTax can handle this common situation.

[NCperson]

@LAtoParkCity one small clarification.  While UT will give you credit for taxes paid to CA, normally, states only give you the credit that you would have paid to its state or what you actually paid to the other state, whichever is lower.

So if you pay $10,000 on the bonus to CA when you were already a UT resident, and if it were paid to UT, the tax would have been $2000, the tax credit on the UT tax return will be $2000 - not $10,000.  

[travel9870]

I have a similar situation but with different states - moving from Washington, DC to Colorado on December 1. Bonus will be paid around 12/31. The bonus is for worked performed during the year almost entirely while resident of DC.

How would this be handled by both DC and Colorado? Thanks!

[TomD8]

@travel9870 --

If you move on December 1st, then for 2024 you will file a part-year resident tax return for both DC and CO.  

If you receive your bonus after becoming a CO resident, it will be fully taxable by CO.

On your DC tax return follow the instructions for part-year residents.  You will find these instructions on page 15 of the DC tax instruction booklet.  Also, see the instructions for Line 8, on page 16.  Here's a link to the 2023 booklet (the 2024 booklet has not yet been published but is unlikely to change the instructions):

https://otr.cfo.dc.gov/sites/default/files/dc/sites/otr/publication/attachments/2023_D40_Book_Final_...

How to file a part-year resident return in TurboTax:

How do I file a part-year state return?

[travel9870]

Thank you for the quick reply! So unlike the California example above, DC does not tax income received when a resident of another state even if the income was earned for services performed while a resident of DC? 

[TomD8]

The DC tax booklet instructions are contradictory.

From page 15 of the DC tax instructions:

"The calculation of tax liability for a part-year resident is pro-rated based on the income earned in DC, during the period of residency."

From the instructions for Line 8, on page 16 of the instructions:

"For each type of income reported on your federal 1040 or 1040-SR, determine the amount you received when you were domiciled in DC."

The DC instructions do not specifically cover the situation in which a bonus is earned while a DC resident but received while a DC non-resident.  But the usual rule is that a bonus is taxable by a state to the extent that it represents compensation earned from work carried out within that state.  The DC page 15 instruction is in accord with that.  (It is always true that the resident state may tax all income received as a resident of that state.)

My recommendation is to follow the page 15 instruction and pro-rate the bonus, allocating the appropriate portion to DC.   If you do that, then you can claim an "other state credit" on your CO return for the taxes you pay to DC on the portion taxed by both entities.  This will prevent you from being double-taxed.