Resolving Dual-State Residency for Income Tax Purposes

Overview

Dual-state residency is one of the most common and confusing state tax problems people face after moving, working remotely, or maintaining homes in multiple states. When two states each consider you a resident, both can claim the right to tax your worldwide (or most) income. That can lead to double taxation, tax notices, and audits if you don’t proactively document and resolve your status.

This article explains how states determine residency, practical steps to resolve disputes, record-keeping best practices, and options for minimizing tax exposure. I’ve helped clients handle these issues for more than 15 years and draw on that experience in the examples and checklists below.

How states decide residency (key concepts)

• Domicile: The legal home — where you intend to return and maintain as your primary residence. Domicile is a subjective intent-based test courts weigh heavily. (See NCSL for comparisons of state domicile standards.) NCSL
• Statutory residency: Many states use a bright-line days test (commonly 183 days) combined with maintaining a dwelling to determine residency. Exact rules vary by state; for example, New York and Massachusetts are aggressive about statutory residency rules.
• Part-year residency: If you moved during a tax year, most states allow split-year treatment (resident for part of year, nonresident for remainder) and prorate tax and credits accordingly.
• Nonresident sourcing and apportionment: Nonresidents generally pay tax only on income sourced to that state (wages earned there, rental income from property there, business income apportioned to the state).

Note: State rules differ significantly. The federal government (IRS) does not decide your state residency; states set their own tests and enforcement procedures. For summaries and state-by-state comparisons, NCSL and state tax agency websites are essential resources.

Typical consequences of dual residency

• Double taxation on the same income if both states call you a resident and tax your worldwide income.
• Requirement to file multiple returns (resident return in one state and nonresident or resident return in another).
• Increased audit risk and possible back taxes, interest, and penalties if a state reclassifies you.
• Administrative burden: gathering months/years of evidence, negotiating with tax agencies, and possibly litigating.

Practical steps to resolve or prevent dual residency

1. Determine each state’s residency rules. Identify whether states use domicile, statutory residency, or a mix. Start with the state tax agency web pages for the states involved and NCSL summaries. (Example: California Franchise Tax Board and New York Department of Taxation each publish residency guidance.)
2. Track days and location. Keep a contemporaneous calendar, travel records, boarding passes, and work logs showing where you were each day. Many states use day counts as a primary factor.
3. Build a domicile story, if applicable. To establish a new domicile, crystallize intent: change driver’s license, register to vote, update mailing addresses, move primary banking relationships, and have a local physician and dentist. These steps don’t guarantee a change, but they create consistent documentary evidence.
4. Sever or minimize ties to the former state. Sell or lease out a second home if practical, reduce local memberships, close local accounts, and avoid spending long continuous stretches at the former residence.
5. File correctly and claim credits. File resident or part-year returns where required. Many states give a resident credit for taxes paid to another state on the same income — claim it to avoid double taxation. The mechanics differ by state.
6. Use reciprocal and commuter agreements. Some adjacent states have reciprocity (e.g., PA and MD in some cases), which permits withholding to be limited to your state of residence. Check your states’ rules.
7. If audited, provide the timeline and documentary proof of intent and presence. If you still owe tax, explore installment agreements and offers in compromise with the state tax agency.

Documentation checklist (what to retain for 3–7 years)

• Day-by-day calendar showing where you were each day
• Travel records: flight itineraries, hotel receipts, tolls, mileage logs
• Lease agreements, property deeds, closing statements
• Utility bills, mortgage statements, and tax bills showing address usage
• Driver’s license, voter registration, and vehicle registration changes
• Employer records: payroll location, telework policies, and worksite statements
• Bank account and broker statements showing deposits and address
• Medical and school records for family members

Examples (realistic situations)

• Remote worker who moved states but continued working for an employer in the old state: If you kept a home and spent over the statutory days in the old state, that state may claim statutory residency. The new state may assert domicile if you moved family, registered to vote, and took other steps.
• Seasonal residents (snowbirds): Owning a winter home in one state and a summer home in another commonly triggers disputes. Courts look at the totality of ties — where the taxpayer spends the most time, family location, and where they intend to return.

When to claim credits vs. change residency

• If both states believe you’re a resident for the same period, your most practical immediate remedy is often to file the returns and claim a resident credit in the state that allows it. That minimizes immediate double tax while you sort the residency facts.
• If you intend to move permanently, focus on changing domicile and documenting that change to prevent future dual residency claims.

Resolving disputes with state tax agencies

• Ask the taxing authority for its residency determination process and follow the published appeals process. Each state has an independent review and appeals board.
• Consider a voluntary disclosure or stipulated agreement when facts are borderline — these can limit penalties in some states.
• Where negotiations fail, administrative appeals or litigation are options; weigh the cost of litigation vs. potential tax savings.
• Engage a CPA or attorney experienced in multi-state tax controversies; their knowledge of state-specific case law and agency practices is often decisive.

Professional tips from practice

• Don’t rely on a single change (driver’s license alone). Build multiple, consistent indicators of your intent and presence.
• Use contemporaneous records rather than reconstructed summaries if audited — day planners, electronic calendars, and travel app logs are strong evidence.
• If you expect to split time between states long-term, seek pre-move planning: set up banking, physicians, and community ties before you physically move to strengthen your domicile claim.

Common pitfalls to avoid

• Assuming that owning property equals residency. Owning a vacation home does not automatically make you a resident, but maintaining it and spending many days there can trigger statutory residency rules.
• Forgetting to update tax withholdings and estimated payments after a move — this can create liabilities and penalties.
• Underestimating state interest and penalty exposure if residency is challenged for earlier years.

Cost/benefit considerations

Resolving dual residency often involves weighing the cost of professional fees and potential litigation against the amount of tax at stake. For smaller exposures, proving residency by documentation and claiming credits is typically sufficient. For larger sums, formal audits, stipulations, or court actions may be worthwhile.

Where to get authoritative information

• Your state tax agency website (search for “residency” or “statutory residency” on the state’s tax department site). Examples include the California Franchise Tax Board and the New York Department of Taxation and Finance.
• National Conference of State Legislatures (NCSL) for state comparisons and summaries: https://www.ncsl.org/
• State-specific guidance on statutory residency and part-year filing rules.

Further reading on finhelp.io:

• State Residency Rules: Determining Where You Owe Income Tax — https://finhelp.io/glossary/state-residency-rules-determining-where-you-owe-income-tax/
• State Residency Planning: Steps to Legitimize a Tax Move — https://finhelp.io/glossary/establishing-state-income-tax-residency-key-factors-and-risks/
• State Residency Strategies for Remote Workers — https://finhelp.io/glossary/state-residency-strategies-for-remote-workers/

Professional disclaimer
This content is educational and general in nature and does not replace personalized tax advice. State residency rules are fact-specific and change over time; consult a CPA or tax attorney licensed in the relevant states for guidance tailored to your situation.

Authoritative sources

• National Conference of State Legislatures (NCSL), State Taxation Resources — https://www.ncsl.org/
• State tax agency residency pages (e.g., California Franchise Tax Board; New York Department of Taxation and Finance)
• Internal Revenue Service (federal tax guidance) — https://www.irs.gov/