A question I get a lot is, “In which state(s) do I have to file a tax return?”
That’s a great question, with a sometimes confusing answer. Basically, the answer is:
- Your home state
- Wherever you have a “physical presence.”
Simply put: Where did you physically earn money during the tax year?
You always have to file in your home state of residence if that state has a state income tax. If you physically traveled to another state to earn money, even if it was for a day, you need to file a return in that state as well.
Think of a professional athlete. A NBA basketball player can play in over 30 states during a year. He must file a tax return in each of those states that have income tax – including pre-season games!
I have a client who organizes and holds conferences in four different states each year. The company has been in existence for many years, but they have never filed a state tax return in any of those states! If those states were to catch up with them, they could be charged with tax evasion at the state level. I advised the client to amend prior tax returns going back as far as the statute of limitations extends in each state.
Not a fun task.
Another aspect to consider is the “state tax gross-up issue.” My home state of Massachusetts has a 5.1% income tax. Massachusetts has a gross-up law that allows the state to make sure you pay 5.1% state tax no matter where you work.
For example, I have a client who lives in Massachusetts, but works in Rhode Island. Rhode Island has a 3.75% tax rate. As you know by now, this client needs to file both Rhode Island and Massachusetts tax returns. He is responsible for 3.75% of his income going to Rhode Island and 1.35% (the difference between the MA rate of 5.10% and the RI rate of 3.75%) going to the Commonwealth of Massachusetts. Massachusetts grossed up the Rhode Island tax for him simply because of his state of residence.
Fair? No. Legal? Yes.
If you have questions on state tax issues or any tax issues, please give us a call (781) 436-5810. We would love to work with you!
