Office stayed in LA, I moved out of state and work from home, help!

[reznathoth]

My employer is a non profit and we were located in California for quite some time. I needed to move home to be closer to my aging parents. So we closed our office there and they decided to use a virtual office address and stay in Los Angeles. So I'm working remotely from Oregon. They continued to take out California taxes since I've been here and I'm worried that I'm going to have a big, scary surprise on my tax return. How do I make sure that I do everything right at this point? The Oregon taxes should be coming out of my paycheck now. Does this basically mean that I overpaid California taxes, underpaid Oregon taxes, and it will figure it out when I put in my move date?

[Nick-K-EA]

When you file your return, you will have to allocate your income between California and Oregon. Most likely, you will be getting a refund from California, and will owe in Oregon. You should fix your withholding as soon as possible, to reduce the magnitude of the problem.

[TomD8 · Accepted solution]

If you've abandoned your domicile in CA and established a new domicile in OR, for 2021 you will file a part-year resident return for each of the two states.

Your income while a CA resident is fully taxable by CA; your income after becoming a resident of OR is fully taxable by OR.

Once your domicile is established in OR, your income is no longer taxable by CA unless you physically work inside CA.  CA can only tax a non-resident on CA-source income.  W-2 income is "sourced" where the work is actually (physically) performed.  

See page 10 of this CA tax booklet for more details on the concept of "domicile":

https://www.ftb.ca.gov/forms/2020/2020-1031-publication.pdf

Thus, if you live in and work exclusively in OR, your employer should cease withholding CA taxes - and ideally should withhold OR taxes for you.

If your employer cannot or will not withhold OR taxes for you, you may want to start making estimated tax payments to OR, to avoid a big tax bill next year.  You'll find the details about that here:

https://www.oregon.gov/dor/forms/FormsPubs/publication-or-estimate_101-026_2021.pdf

[reznathoth]

Thank you so much for the detailed response, this helps very much. 

So I paid May and June taxes to California. My employer told me that this next pay period should be withholding to Oregon now. So there are two months that shouldn't have gone to California. 

Will California see and recognize the over payment and adjust accordingly on my tax return next year?

[Nick-K-EA]

Your W2 will reflect the amount paid to California. If this turns out to be an overpayment, you will receive a refund for the excess. California may demand proof of when you moved to Oregon, and if they do, your refund will be delayed by that process.

[TomD8]

@reznathoth --

I suggest you (1) obtain an Oregon drivers license; (2) register your vehicles in Oregon; and (3) register to vote in Oregon ASAP.

Doing these things will substantiate your change in domicile, in case you are subjected to a residency audit by CA.

[Opus 17]

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@reznathoth wrote:

Thank you so much for the detailed response, this helps very much. 

So I paid May and June taxes to California. My employer told me that this next pay period should be withholding to Oregon now. So there are two months that shouldn't have gone to California. 

Will California see and recognize the over payment and adjust accordingly on my tax return next year?

---

It's not on CA, it's on you.  

If you file as a part-year CA resident and a part-year OR resident, Turbotax will ask you to allocate your wages to each state based on where you were living at the time.  If it turns out that you paid more state withholding than the taxes you owe (because withholding went on longer after you moved) then you will claim a refund on your state tax return when you file it.

It is extremely critical that if you want to say you moved out of CA, you must take active steps to establish a new domicile in OR and abandon your CA domicile.  If CA views your move as temporary, and that you are still domiciled in CA, they will assess full year taxes even though you moved, and you will have to fight to prove otherwise.  (It is possible for you to be considered a legal full-year resident of California if your move was temporary, and temporary can sometimes mean years.  Please read about the concept of domicile.)

[reznathoth]

Okay, so how do I do that other than the steps I've already taken?

• I immediately changed my address with USPS when I moved
• I got my driver's license in Oregon
• I'm getting my title and car registration done, but it's going to take months due to the back log in Oregon
• I am renting and have a new permanent address in Oregon
• I have utilities set up in my name in Oregon

Is there more that I need to do to establish residency here?

[Opus 17]

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@reznathoth wrote:

Okay, so how do I do that other than the steps I've already taken?

• I immediately changed my address with USPS when I moved
• I got my driver's license in Oregon
• I'm getting my title and car registration done, but it's going to take months due to the back log in Oregon
• I am renting and have a new permanent address in Oregon
• I have utilities set up in my name in Oregon

Is there more that I need to do to establish residency here?

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To establish a new domicile, you also have to abandon your old domicile.  Part of that will be getting a drivers license and registering to vote, since you usually can't do those things in two places at the same time.  Abandoning your domicile in CA might also mean surrendering your lease (if you moved out early) or selling your house (instead of keeping it as a vacation or second home), or renting your house out and getting a signed lease from the tenants.  

There's no single determining factor, its based on all the facts and circumstances unique to your situation.  Just be aware that California is particularly aggressive about collecting state income tax and they will be looking for clues or hints that you are hanging on to your CA address for a future return.  You can always claim you changed permanent residences, but you have to keep in mind having a "defense" against CA trying to argue your move was only temporary.