Just as the wonder of Christmas and the New Year dawns, the annual song and dance begins with plethora of ads targeting the stress of taxes and tax filing. Even the Super Bowl during time outs is tainted with plead for your loyalty to a particular tax software or chain.
Travelers present a different drama to a tax professional. “You do what?” askes the tax representative often sounding like your relatives at your Christmas gathering becoming concerned that therapy is your next destination. We know…. We are just unique right?
So comes tax filing. How many states? How many W2s? We are different yet again
One of the greatest challenges travelers need to be aware of when tackling their taxes is how to properly file those state returns.
State Filing Basics
The one big difference in the tax returns that travelers file is the number of states. In our tax practice we can occasionally see a traveler with up to 6 states and since we also serve professional sports players, that number can rise to 16 or more thanks to their road games. Some travelers make the mistake of thinking they are only required to file taxes in one state.
This is not the case. We are required to file in all the work states as well as our home state unless a reciprocity rule overrides the normal arrangement. Being a non-resident doesn’t exempt you from tax. Your earning income within the state borders on assignment and therefore are subject to that states tax structure on that income. As a resident of your home state, you are subject to tax on ALL your income by that state. Fortunately, your home state will credit you for taxes paid to the non-resident states, so you are not double taxed.
This attention to your home state is very important in protecting your practice license especially if you hold a multistate compact license in your profession. When professional practice boards validate these licenses at renewal, they look for the normal signs that the applicant is truly a resident of that state. A resident tax return is one critical verification tool that the boards use.
This is why having your taxes done professionally by a chain requires some extra oversight on your part. Most chain tax preparation companies teach their preparers to follow a cookie cutter days of presence approach to determining residency and often we correct clients returns when the preparer filed the traveler as a part year resident of each state they worked in. This goes beyond tax returns as well. Getting a drivers license in another state will often cause friction with a compact license as a driver’s license is another one of the tools licensing boards will use in validating residency.
Some of the statements from clients that are new to traveling that we frequently hear are
- “I didn’t work at home, why are you filing a return there?”
- “I don’t live there, why are they taking taxes out for that state”
- “Since I don’t live there I am exempt for taxes there” (especially those from states without an income tax 😊 )
- “None of my travel friends so that” assuming that loosing yourself in the herd of non-compliance provides immunity
Staffing Agency Blunders in Reporting Income
Allow me to vent a bit please? I have been doing multistate tax work for 25 years and was a traveling respiratory therapist for several years as well. It amazes me that our industry as mature as it still manages to foul up payroll when it comes to reporting the income to the proper state. Just in the last year, we saw the following examples of airheaded payroll management
- Reporting Hawaii earnings to California
- Reporting state earnings to the location of the agency’s headquarters
- Reporting earnings in Wisconsin to the traveler’s home state
- Not reporting to any state at all
And my apologies to all the wonderful Canadian travelers for the practice of established agencies not being able to incorporate a foreign address in their payroll and insisting that you pick some fictitious US state to pretend you live in. And then having the audacity to report your earnings in both the state you worked and the state you pretend to live to help the payroll software work. Canada Revenue Agency will not accommodate those doubled foreign credits
And then when the agency blunders, it takes an act of congress to get someone to write a simple letter on the agency letterhead explaining the actual location of earnings so you can properly file your return with the state you neither lived in or worked in and get the withholding back.
Thank you, I feel better now …..
The takeaway is this- ALWAYS look at your first paystub with each new contract and make sure the agency has got the reporting and tax withholding correct. Don’t ignore it. You will save a lot of problems down the road if you do.
The State “Discovery Unit”
Want to join an exciting covert operation where your job description includes finding taxpayer ghosts that pretend to live elsewhere but are really in your back yard? Welcome to the Discovery Unit or as one southwest state calls it, the Project Assessment Unit.
What is this department? It’s a group of sleuths that scour drivers’ licenses, car registrations, addresses on Federal tax returns / W2s compliments of data feeds from the IRS, and professional practice licenses to find taxpayers that should be filing as a resident of a state that are trying to be invisible. New York sends scouts at night through neighborhoods in neighboring states to find New York license plates as well as New York neighborhoods to find out of state plates that are parked one too many times in a neighborhood.
California has trolls that wander through apartment complexes logging out of state license plates looking for cars that have become frequent visitors to determine whether they are really living there. Some apartment managers join the hunt as well. That suspicious dude in a hoodie looking at the cars in your parking lot may very well be on a different kind of theft as an agent of a state tax department
It happens though not as sinister as I might be presenting it, but it reminds us that are in the mobile lifestyle to guard our tax homes and legal ties with all the energy we can give it. As the old song laments being “torn between two lovers, feeling like a fool”, carelessly leaving breadcrumbs all over the nation can lead to a lot of hungry state revenue agencies hiding in the shadows of your life.
I have represented clients in some pretty wild state residence cases that prove my point
Ohio taxpayer and their spouse resided in a midwestern state, but both worked insane hours in the energy industry. Wife becomes pregnant and goes to Maine to be near family during her delivery. Two years later they get a letter from Maine revenue assessing them for tax on all their income that year. When talking to one of the attorneys with the Maine tax department to resolve the issue she pointed out that the taxpayer had their baby in Maine hence she was a resident of Maine. If she wasn’t a resident, why did she deliver in Maine? And this was a female attorney that said this mind you. Probably had never been pregnant 😊
This happens a lot: recently divorced, moving to another state but has mail delivered to parents for safety. State revenue agency sees this and assesses the taxpayer for resident taxes on all the income earned in the calendar year.
More frequently, taxpayers move to another state and fail to change their drivers’ licenses and other legal ties. The assumption that state tax departments make is that if you take off and go elsewhere you need to prove that you landed there and severed ties to the former state.
What to do?
I hope my effort at humor helps you understand the importance of your state tax returns. Compared to the states, the IRS is in many ways a harmless fuzzball. Filing right and living consistently with your legal ties will 99% of the time help avoid problems with the states.
We hope you found these tips for travel taxes helpful. Do you have any travel taxes nightmares to share/ Comment them below.
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