Snowbird Follow Up Question

[Lynna]

I recently purchased a second home for snowbirding purposes. I am not retired, and work remotely, so I can efficiently work in both locations.

The second home loan is in my name while the first home loan is in my spouse's name, but we are each on each other's titles. I will be spending more time in the second residence, so I have changed my address for my employer to the second residence. 

Question 1 : Do I need to also change my drivers license to the new state?

Question 2: Does it sound correct to file jointly for Federal tax and separately for state taxes, as my spouse will be spending most of the year in the first residence. ? Am I missing any potential pitfalls?

[MartyG · Accepted solution]

You have a few different issues in your question.  One is residency, and the another is state taxation of the income earned.  It is also complicated (but potentially beneficial) if you and your spouse are residents of different states.

1. Generally speaking for federal purposes, married filing jointly is almost always better than filing married separately.  So no matter what you do, unless you are the rare exception, you should file married filing joint.

2.  Residency.  If you are spending most of the year, in your 2nd home, and you have let your employer know that you have changed your residence, it is probably prudent to get a driver's license in the new state.   Especially if the state does not have an income tax. This is not conclusive, but it solidifies the evidence that you changed residency.  HOWEVER, this only slightly changes your income tax situation.  Assuming both states have an income tax, you are generally taxed by how much income you earn by working in each particular state.  It gets complicated, but for the resident state, you would report all of your income from all states and then take a credit for taxes paid to the non-resident state.  For the non-resident state, you would only report the income you earned in that state.  This is not necessarily the state income reported on your W-2, but rather the income you actually earned in each state while present in that state.  As mentioned above, if your new state does not have an income tax, then all of the above applies, but you would pay no income tax on the amount earned in your new resident, non-taxed state.

To further complicate this, depending on the state, you may or may not be able to file married separately in the state if you filed married joint for federal.  If your state allows it, yes it is best to file the federal jointly and the state separately.  You need to check your individual state rules.  This works for New York and is great if you move to Florida (non-income-taxed state).

You don't really have any pitfalls (no matter what you do), as income is taxed where you are when you earn it.  The trouble is getting the facts straight, getting the income per state straight, and getting the individual state rules on filing separately straight.  Very complicated and very confusing, but if done right, you won't pay tax on the income in more than one state (after taking into account credits).

As an example, if you moved from NY to FL, you would definitely want to make the case for changing residency to FL, as it has no income taxes.  In this case you would definitely want to get a FL driver's license.  That way, you would only pay state income taxes on the income you actually earned in NY.   But make sure you allocate income carefully based on where you did the work.  Otherwise NY may get testy.

I hope this helps,

Marty

[Lynna]

Thank you, Marty.

The new residence state is a non-income tax state, and my employer has approved my listing residency there, and I will follow your advice and get a drivers license in the new state.  Thanks again.