Multi-state tax issue

[VAM54]

I'm a resident of Alabama but work and live part-time in Tennessee.  My employer, who is located in South Carolina, is taking SC income taxes from my check. I asked that they take Alabama but for some reason, they don't think they can do so. I don't think I should be paying SC income taxes as I'm not working in SC. Am I right in thinking they shouldn't be taking SC taxes?  If so, is there something I can provide to my employer to have this changed?

Thanks so much.

[GeorgeDenseff · Accepted solution]

When you file your income taxes next year, you will file a return for South Carolina and a return for Alabama.  Tennessee does not have state income tax.

You will show that you paid taxes to South Carolina and assign those taxes back to Alabama.  When it asks what percentage of the income was earned in South Carolina, you will put zero.  You will then put 100% for Alabama on the Alabama return.

Just remember to do your non-resident state first.  That way TurboTax will compute this correctly.  

You are correct that your employer should be withholding  taxes for Alabama.  If they make that correction, you will not have to file two state returns in future years.

The law is that you cannot be forced to pay more than one state for the same income.  No double taxation is allowed. 

[VAM54]

Thanks for the great response.

Just to be certain I understand... when you say that my employer should be withholding taxes for Alabama, does that mean they should be withholding for Alabama and not SC? So, only withholding for one state, correct?

Also, can you point me to the actual law that states you can't be taxed by more than one state for the same income?

Thanks again!

[GeorgeDenseff]

Your employer should only be withholding Alabama taxes for you.  This might mean more work for their accounting department.  But it is what they are expected to do.

This is an article on the double-taxation case:
 Comptroller of the Treasury of Maryland v. Wynne

[Mike9241]

no one can force a company to withhold non-resident state income taxes.   that's because every state that I know of would require your company to register as a withholding agent before they can legally withhold that state's income taxes and be required to file withholding payroll tax returns.  you can't force a company to do it but you can ask.

I disagree with the other answer

"You will show that you paid taxes to South Carolina and assign those taxes back to Alabama. When it asks what percentage of the income was earned in South Carolina, you will put zero. You will then put 100% for Alabama on the Alabama return."

you say you have no physical presence in SC (ie you do not perform any work in SC) so you would file to get back all the withholding.  I base this on a ruling by SCOTUS that concluded a state can't tax you if you have no physical presence (not part of the ruling but  nor income-producing property in that state). 

I'm a resident of Alabama but work and live part-time in Tennessee. it's important for you to figure out which state is your state of domicile. 

Domicile is a person’s permanent place of dwelling. It is a legal relationship between a person and a locality. It may or may not be of same meaning as the term ‘residence’.

The concept of domicile has different meanings in different context. For purposes of jurisdiction, “domicile” means a legal residence which is the place where a person has fixed dwelling with an intention of making it his/her permanent home.

Domicile is a combination of two factors namely, residence and intent to remain. As the term domicile includes residence, the scope and significance of the term domicile is larger than the term residence. An individual may have several residences whereas; s/he will have only one domicile. Domicile is more used in reference to personal rights, duties and obligations (filing tax returns).

Generally residence is referred to a place, where one person lives. It is also a building used as home. Residence is of a more temporary nature compared to domicile. An individual’s present physical location of stay is residence. It may be one among several places where a person may be present. Residence can also be referred to a person’s fixed place of stay without any intention to move from there.

Domicile involves intent of an individual whereas, residence is something objective. A person may have his/her residence in one place and his/her domicile in another.

Whether the term ‘residence’ used in a statute will be construed as having the meaning of ‘domicile’, or vice versa, depends on the purpose of the statute. Also, the nature of the subject matter as well as the context in which the term is used would be taken into consideration.

Residency is a more flexible concept than domicile, and permanency is not a requirement for residency. Even a temporary and transient place of dwelling can qualify as residence. In addition, a minor is legally unable to establish a residence separate and apart from their parents.

Alabama says: In general, one is a resident of Alabama if one is domiciled in the state. That is, if a person has a permanent home in the state or intends to return to the state after a temporary absence elsewhere, the state of Alabama will consider him a resident. The individual bears the burden of proof to show if they are no longer domiciled in Alabama.

Things that a state would look to in determining domicile include where do you vote, where do you have a drivers license, do you own and live in one place while at times renting to live in another place, how many days or nights are you present in each state.  you'll have to make this determination of domicile.  

so if your domicile is AL you file a full-year resident return and pay state income taxes there on your worldwide income. you get no credit for SC taxes.  you should talk to your company about withholding AL income taxes. if they won't you'll need to pay estimates to avoid penalties for not paying taxes on a timely basis.

on the other hand, if TN is your state of domicile. since it has no income tax no return for this state, 

per AL:  An Alabama Part-Year Resident is any individual who moved into the state. Income attributable to Alabama is taxable on the state return. You may need to claim a credit for taxes paid to the other state if the same income is taxed on both state returns.

An Alabama Nonresident is an individual that does not maintain a permanent home in Alabama.

see this link for AL filing requirements

https://support.taxslayer.com/hc/en-us/articles/360015704632-What-are-Alabama-s-Filing-Requirements- 

in these cases also, you make estimated tax payments.

state taxes are complicated. for example, pro athletes many times have to file in many states because they're domiciled in one state but are deemed to earn their salary while playing in a different state.

[Hal_Al]

Submit for SC W-4 to your employer and check box 7:

I claim exemption from withholding for 2021. Check the box for the exemption reason and write "exempt" on line 7. For tax year 2020, I had a right to a refund of all South Carolina Income Tax withheld because I had no tax
liability, and for tax year 2021. I expect a refund of all South Carolina Income Tax withheld because I expect
to have no tax liability.

You employer may not want to bother (and is not required to) withhold AL tax, but he should not be withholding SC tax, so that you don't have to file an SC return every year to get a refund.  You'll have to make quarterly estimated payments to AL. 

The general rule is: your report all your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state. 

Since TN does not have an income tax, you do not have a non-resident return to file. But you still have to pay tax on that income to your home state (AL).  In other words, having worked in a state without an income tax does not get you out of paying state tax on that income, to your home state.

You say "I'm a resident of Alabama".  That means you owe AL tax on all your income. Working and living part-time (I assume for work purposes) in Tennessee, does not get you out of that.  If your work state was one with an income tax, "live part time in TN", might get a little trickier, but almost always comes down to pay tax to the work state and home state  take a credit from the home state. 

[TomD8]

@GeorgeDenseff wrote:  "You will show that you paid taxes to South Carolina and assign those taxes back to Alabama."

Unfortunately, it is not possible to "assign" withheld SC taxes back to Alabama.  What you must do is this:

1.  At year's end, enter your W-2 as is.  File a non-resident SC tax return, but allocate zero income to SC.  This will result in SC refunding the incorrectly withheld taxes to you.  If you neither live in, nor physically work in, SC, then your work income is not subject to SC taxation.

2.  File a resident Alabama tax return, reporting all your income from all sources.

3.  Claim exemption from SC withholding as described by @Hal_Al .

4.  If your employer cannot or will not withhold AL state taxes for you, begin making quarterly estimated tax payments to Alabama.  This web reference explains how to do that:

https://revenue.alabama.gov/individual-corporate/individual-income-tax/individual-income-estimated-t...

[wgtimmins]

I have used TurboTax for multiple states and not found it useful

I still am contacted by the states for more information and not receive a refund as expected by turbo tax. Please be more careful with the different states requirements. New Mexico, being one of them.

[kanaankassab]

my residence is NC and I worked all year 2021 in SC and paid taxes in SC do I have to file in NC where I did not have any income ?

[Hal_Al]

Q. My residence is NC, do I have to file in NC where I did not have any income ?

A.  Yes. 

The general rule is: your report all your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state. You will have to file a non resident SC state return and pay SC tax on the income earned there.. You will also file a NC full year resident return and calculate tax on ALL your income. NC will give you a credit, or partial credit, for the tax you pay SC. So, there will be little or no double taxation, but you have the cost and hassle of filing two state returns. Do the nonresident state return first.