State Tax – Residence, Multi-State Taxation

State Tax – Residence, Multi-State Taxation

By: Martin M. Shenkman, CPA, MBA, JD

Danger Zone – Wear Tax Hardhat When you enter a construction site, you’re usually greeted by a warning sign, and often required to wear a hard hat to protect you from falling objects. Well, navigating the state income tax maze is plenty risky, and state tax audits can blind side you just like a screw driver dropped from above. It's no secret that most states are struggling financially and desperate to raise revenues. That means increased and tougher tax audits and less sympathy for those caught.

What the Tough New State Tax Environment Means to You What does this new aggressive state tax environment mean for you? Well, let’s give you some of the bottom line conclusions of this. The rules are tough. The penalties are tough. If you work in more than one state, and have ties to more than one state, you need to keep a calendar/log of what you do, when and where. Don’t rely on what used to work. It may not help you. Read on for more details.

Tax Filings If you are required to file a tax return in a particular state to report your earnings and you don’t file for three years in a row that could be a felony! Have we got your attention yet? While you might be struggling to cover your living expense and get three squares a day, doing it in a striped outfit at a state run facility may not be what you had in mind.

Don’t Rely on What Joe Told You Just because you did whatever you did (or didn’t do, like not filing a tax return in a particular state) in the past didn’t raise state tax auditor eyebrows, don’t make the assumption that it was correct, or that it won’t create problems in the future. Just because all your friends brag to you while golfing with you in NY that they’re Florida, Nevada or other low/no tax state residents, doesn’t mean that their game will work.

Records, Records, Records You have to keep good records to minimize your taxes, audit issues and hassles.

Planning Tip. Just because your friends did “such and such” for tax purposes, or you heard that everyone who buys a cheap condo in Miami and registers to vote in Miami doesn’t pay any New York or New Jersey state tax, doesn’t mean that was correct in the past, and it really doesn’t mean it will fly now and in the future as states crave tax revenues.

Planning Tip. Keep a detailed journal/log of where you lived and where you worked and what you earned. Good records are the key to proper filing, planning to minimize tax, and to defending an audit if your lucky number comes up. If you haven’t been doing this start today.

Planning Tip. Fill in a log or journal. Save airplane tickets. Try to avoid having to recreate information after the fact. Save cash and EZ Pass receipts to prove where you were. You were probably just tossing receipts because you paid cash for food and other non-tax deductible items. Instead, file those receipts in your calendar/log book to prove the accuracy of your records and that they were kept currently. Tax authorities always find current (they call them “contemporaneous”) records more persuasive.

Verify What Each State Wants You to File Find out what the filing requirements are for every state you live in, work in or visit for an extended period. Start with the internet. It’s free and relatively easy. State tax return instructions should not be that hard to find and they should give you a good start on figuring out what to do. Then, consult your CPA.

Planning Tip. Be sure to consult with a CPA in the state in which you are domiciled (we’ll define that key term below). That will be a factor that supports your claim to be residing or domiciled in that state. If there is a doubt, file a return. If you don’t file, interest, penalty, and possibly criminal (yes really) charges can be triggered. The idea of not filing to stay under the state tax radar is, in the words of my mom, “playing with fire.”

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