Paying Taxes on Two Homes
Homebuilders like Ryland Group (RYL), KB Home (KBH), and Beazer Homes (BZH) acquire
their fortunes from homeowners, especially retirees, wanting to buy second homes,
many times in a different state. But when it comes to taxes, where you live is very
important. People who live where there’s no state income tax, such as Florida and
Texas, should avoid paying income tax in other states. The one thing you would want
to do is make sure you are not paying taxes twice on the same income.
Taxes and residency
There are two ways a state can require you to pay income taxes. The first is if
you are a resident, and your income is earned from resources within the state. And
the second is if you earn income within the state even if you’re not a resident
of that state.
For example, let’s say you live in Huntsville and do your business throughout North
Alabama. To Alabama you are a resident because you live there, and it has the right
to tax all of your income. Nevertheless, if you earn 30% of your income from doing
business in Tennessee, then that state can impose an income tax on that 30%, even
if you are not a resident of Tennessee.
When dealing with multiple states and their income tax systems it can be very difficult.
However, things can get worse if you live in two different states during various
times of the year (as owners of multiple homes usually do).
Two classifications of ‘resident’
The problem that taxpayers face when residing in two different states is that the
policy governing whether a state will consider someone a resident isn’t consistent
from state-to-state. Because of that you have to examine the tax laws of both states
to find the one that will claim you as a resident, whereby enforcing tax on your
Certain states have strict guidelines on filers they consider residents. For example,
New York deals with many people who spend a lot of time in New York, yet they still
continue to keep their homes in tax-free Florida. For those who have been avoiding
paying state income taxes, there’s no more free ride. New York has now decided to
tax anyone who has a permanent home in the state, have a tax residence, and spends
at least 30 days there.
To find out if taxpayers have a New York tax residence or not, the state takes several
things into consideration, like where they work, if they have property in another
state, where they get medical care, where they vote, where their vehicles are registered,
and where their family lives.
Let’s take California for example, which must deal with taxpayers traveling to and
from Nevada and Washington, both tax-free states. Nevertheless, California has specific
set of laws that limit the state tax department’s ability to treat taxpayers as
residents even if they own a house, have bank accounts, or belong to social clubs
within the state.
A break on double taxes
Even if you have to file more than one tax return, you won’t have to be bothered
with double taxes unless you live in multiple states. In most states, residents
are allowed to claim credits for income taxes they had to pay other states. So in
the case of the Huntsville resident, Alabama would give them a break by permitting
them to claim a credit for any taxes they had to pay on their income from Tennessee.
Most retirees’ income, like dividends, and other regular investment income, is viewed
as earned income in the state in which they keep their primary tax address.
It would not be easy to come up with an alternative system because the physical
location of stocks, bonds, and other securities is hard to describe. However, irregardless
of your residence, you may have to treat other types of income, like rental income
on real property or capital gains from the sale of real property, as income from
the state where the real property is located.
If you can abide by the rules of the tax-residency, you can save yourself some money.
If not, even though the state tax credit can decrease taxes in multiple states,
you may end up paying a higher tax rate than you have to.
Even though state tax rates are lower than the federal rates, you still want to
minimize them especially if you’re a retiree. Finally, if you live in different
states during the year, it’s important that you are aware of the state’s tax rules
that apply to you so that you will not be caught unawares.