I am having a bit of an issue trying to figure out the proper state tax returns to file for 2020 tax returns and in what order.
I lived in the Netherlands with foreign income up until Feb 16, 2020 (flew home due to covid lockdowns). Worked for the foreign company from the US up until taking a job with a US company based in Massachusetts on April 18, but working from Georgia. Bought a house in New Hampshire to work at that Massachusetts job - never lived in Massachusetts. I have rental properties in Georgia. It seems like MA requires state tax returns to be filed there regardless of whether you ever lived in the state. New Hampshire has no state tax. Georgia taxes are required due to rentals there. Which state gets to tax my foreign income which should not be taxed at all because there is a foreign tax treaty, but somehow it looks like everyone wants a piece of the pie.
Also, I bought a cabin in N. GA that needed rehab. I tried to enter it as a rental property but since it did not receive any rent for the year but had lots of rehab expenses, it was not a sch E property. Where do I enter this? Is it a sch C biz until it is done being fixed and rentable?
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OK, the first thing we have to talk about is domicile.
Your domicile is your true and permanent home. There is no single test to prove where your domicile is, it is a combination of many factors. You can only have one domicile at a time. It is possible for someone to move without changing their domicile, even for a long period of time. In addition, to establish a new domicile, you must also take active steps to abandon your prior domicile.
The Pennsylvania tax web site does a very good job of describing this, I was just there today for another question.
Once you have established a domicile in a US state, you are a resident of that state and you owe taxes in that state, even if you move around, unless you abandon that domicile and establish a new one somewhere else. Establishing a new domicile requires intent. If it is your intent to return to the Netherlands, then you have not established domicile in any state, even if you don't have a definite return date. If you moved to Georgia temporarily (such as with relatives) but your intent was always to establish a permanent residence closer to your job, then you never established domicile in GA but did establish domicile in NH. If it was your intent to live permanently in Georgia, but you had a change of circumstances and it became your new intent to live permanently in NH, then you did have a GA domicile even if was short term.
You will generally owe a resident income tax return in the state where you are domiciled, that pays income tax on your world-wide income, and a non-resident return in any state where you were living, even temporarily, for money earned while living in that state.
Also, you can be a statutory resident of a state even if your domicile is not there, if you live in the state more than 183 days of the year in a fixed abode (such as a home or apartment, but usually not a hotel).
Finally, I don't see any indication that Massachusetts will try and tax you. MA does not tax teleworkers, and you have never had a temporary or permanent residence in MA.
Now, you need to analyze your situation again. Have you actually abandoned your domicile in the Netherlands, or are you planning to move back? If you abandoned your NED domicile, did you establish domicile in GA? Did you then abandon your domicile in GA to establish a new domicile in NH? Or did you establish domicile in NH only because GA was temporary.
To give one example of how this plays out, let's say your intent was that the move to Georgia was intended to be temporary, you lived in Georgia less than 183 days, and you established domicile in NH on July 1, 2020.
1. You are not required to file a NH tax return because NH does not have personal income tax.
2. You would file a non-resident GA return, that reports only your GA-source income. Your GA-source income is your GA rental property, as well as all wages paid to you by any employer while you were living in GA. You will have to do this allocation in Turbotax.
3. The only reason you might owe MA income tax is if you travel to MA for your work, such as to meet in person with other members of your team. If you attend in-person meetings 1 day every 2 weeks, for example, MA will consider that 1/10th of your income is earned "in-state" and you would then file a MA non-resident tax return to allocate part of your wages to MA.
Other fact patterns would be analyzed following the same principles.
For your rental property, costs to improve the property before it is available to rent are not deductible on schedule C or schedule E. They are added to the cost basis of the property and become part of your depreciation expense once you place the property in service as a rental. Managing residential rental property is rarely a schedule C business in any case.
OK, the first thing we have to talk about is domicile.
Your domicile is your true and permanent home. There is no single test to prove where your domicile is, it is a combination of many factors. You can only have one domicile at a time. It is possible for someone to move without changing their domicile, even for a long period of time. In addition, to establish a new domicile, you must also take active steps to abandon your prior domicile.
The Pennsylvania tax web site does a very good job of describing this, I was just there today for another question.
Once you have established a domicile in a US state, you are a resident of that state and you owe taxes in that state, even if you move around, unless you abandon that domicile and establish a new one somewhere else. Establishing a new domicile requires intent. If it is your intent to return to the Netherlands, then you have not established domicile in any state, even if you don't have a definite return date. If you moved to Georgia temporarily (such as with relatives) but your intent was always to establish a permanent residence closer to your job, then you never established domicile in GA but did establish domicile in NH. If it was your intent to live permanently in Georgia, but you had a change of circumstances and it became your new intent to live permanently in NH, then you did have a GA domicile even if was short term.
You will generally owe a resident income tax return in the state where you are domiciled, that pays income tax on your world-wide income, and a non-resident return in any state where you were living, even temporarily, for money earned while living in that state.
Also, you can be a statutory resident of a state even if your domicile is not there, if you live in the state more than 183 days of the year in a fixed abode (such as a home or apartment, but usually not a hotel).
Finally, I don't see any indication that Massachusetts will try and tax you. MA does not tax teleworkers, and you have never had a temporary or permanent residence in MA.
Now, you need to analyze your situation again. Have you actually abandoned your domicile in the Netherlands, or are you planning to move back? If you abandoned your NED domicile, did you establish domicile in GA? Did you then abandon your domicile in GA to establish a new domicile in NH? Or did you establish domicile in NH only because GA was temporary.
To give one example of how this plays out, let's say your intent was that the move to Georgia was intended to be temporary, you lived in Georgia less than 183 days, and you established domicile in NH on July 1, 2020.
1. You are not required to file a NH tax return because NH does not have personal income tax.
2. You would file a non-resident GA return, that reports only your GA-source income. Your GA-source income is your GA rental property, as well as all wages paid to you by any employer while you were living in GA. You will have to do this allocation in Turbotax.
3. The only reason you might owe MA income tax is if you travel to MA for your work, such as to meet in person with other members of your team. If you attend in-person meetings 1 day every 2 weeks, for example, MA will consider that 1/10th of your income is earned "in-state" and you would then file a MA non-resident tax return to allocate part of your wages to MA.
Other fact patterns would be analyzed following the same principles.
For your rental property, costs to improve the property before it is available to rent are not deductible on schedule C or schedule E. They are added to the cost basis of the property and become part of your depreciation expense once you place the property in service as a rental. Managing residential rental property is rarely a schedule C business in any case.
Thank you for the detailed explanation. The domicile issue is a bit murky based on so many factors and changing intent (covid lockdowns in the EU). I can get any number of documents to prove domicile in any of the states - home is where I hang my hat (that day). I am guessing that I need to pick an intent and then gather the docs to "prove" it, should the issue come up.
Re: MA taxing. Thank you so much for this. I had read the MA law and obviously skipped over the allocation part. It will make a HUGE difference in the amount they will refund based on only being on-site for less than 30 days for the entire year.
Re: New rental. I have added the property as a new rental (renos added as capital improvements) but have decided to sell it in 2021. Therefore, it will never actually be used as a rental nor have rental income. At this point, should I just remove it as a rental property, and just deal with it as an asset that I will have to calculate capital gains on 2021 tax returns when I sell it?
Thanks again
@Chela Rocks wrote:
Thank you for the detailed explanation. The domicile issue is a bit murky based on so many factors and changing intent (covid lockdowns in the EU). I can get any number of documents to prove domicile in any of the states - home is where I hang my hat (that day). I am guessing that I need to pick an intent and then gather the docs to "prove" it, should the issue come up.
Re: MA taxing. Thank you so much for this. I had read the MA law and obviously skipped over the allocation part. It will make a HUGE difference in the amount they will refund based on only being on-site for less than 30 days for the entire year.
Re: New rental. I have added the property as a new rental (renos added as capital improvements) but have decided to sell it in 2021. Therefore, it will never actually be used as a rental nor have rental income. At this point, should I just remove it as a rental property, and just deal with it as an asset that I will have to calculate capital gains on 2021 tax returns when I sell it?
Thanks again
The situation that would cost you the most state income tax (and which you should therefore avoid), is if you lived in Georgia for more than 183 days but it was never your domicile. If you lived in Georgia more than 183 days, you will want to make the argument that you changed your domicile from Netherlands to Georgia, and then later changed your domicile from Georgia to New Hampshire, with each change supported by both intent, and active steps to abandon the prior domicile. If you lived in Georgia less than 183 days, it doesn't really affect you if Georgia was your domicile or not, although it does change which tax form you would file. (If Georgia was your domicile, you would file a "part-year resident" return, and if Georgia was never your domicile, you would file a "non-resident" return.)
For the rental, if you will sell it in 2021 without ever having rental income, I would not list it as rental property on your 2020 return. At best, you would claim a deduction for some depreciation on your 2020 return that you would immediately pay tax on with your 2021 return. Keep proof of your rehab expenses, because they will increase your cost basis and reduce your capital gains.
Thank you 👍
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