Will I get double-taxed? Primary address in North Carolina but work is in California

Question

Disclaimer: I am aware that users here are not paid/licensed U.S. tax professionals and that I should only make decisions impacting my taxes with a licensed financial advisor.

Hi! I have a job in California but after the Pandemic hit I gave up my apartment (and California address) to be with family in North Carolina. My company knows about this arrangement and approved this temporary work relocation. I intend to move back to California next July when my company's offices are slated to re-open.

In my company's internal systems I changed my primary address to the NC address I am physically located at the moment. However, my company recently notified me that doing this might make me eligible to pay both CA and NC taxes.

If I just want to pay CA taxes and avoid double-taxation, what are my options here? Here what I see:

• This source claims that "North Carolina holds you to be a resident if you live within the state for 183 days or more during the tax year ... if you are a resident of another state, you may claim North Carolina taxes paid as a credit against that other state's taxes. This avoids double taxation of your income."
  • (although I would still need to deal with the hassle of filing in two states -- ideally this just means 30 more minutes on TurboTax, but feel free to shout out if it's more complex than that ...)
• Use a CA-based friend's or family's address in my company's internal system, ensuring that CA taxes are paid but that double-taxation doesn't occur

What do people about the pro's and con's of these options? Curious to hear about what else I should be thinking about, or if there are existing threads on this topic

Answer 1

In general, unless there is an agreement between the states, you are taxed in both the state of residence and the state that is the source of the income. If those two states are different, you can always claim a credit in one of the two states (exactly which one depends on the pair of states; for CA and NC, the credit is claimed in the state of residence), equal to the lesser of the tax paid to the two states on the doubly-taxed income, so the net amount of tax you pay is the greater of the two taxes.

Figuring out what is the state of residence, and what is the state of the source of the income, are both tricky in your case:

• State of residence: I am not sure whether this will be CA or NC for you during the period you are working remotely. California says you are a resident if you are 1) Present in California for other than a temporary or transitory purpose, or 2) Domiciled in California, but outside California for a temporary or transitory purpose. North Carolina defines it similarly. I would say that you are domiciled in California, and probably in North Carolina for a temporary or transitory purpose. There is a presumption that if you stay in NC for more than 183 days in the year that you are a resident, but this presumption can be overcome with convincing proof to the contrary.

• State of source of the income: For work income, it is generally to be considered to be sourced from the location where the work is performed. For someone working remotely, that means that the source of the income is the place where you are when you work remotely -- in your case, North Carolina.

So basically, I see two possibilities. If you are considered a resident of North Carolina during the period of your remote work, your income during this period is North Carolina income of a North Carolina resident. You will only be subject to North Carolina tax on income from that part of the year.

On the other hand, if you are considered a resident of California during this period, your income is North Carolina income of a California resident. It will be subject to both California and North Carolina tax, but you can claim a credit on your California tax return (since you are a resident of California) for the tax paid to North Carolina on that income, up to the amount you paid in tax on that income in California.

Answer 2

Your situation is complex for two reasons, only one is related to COVID.

I gave up my apartment (and California address) to be with family in North Carolina. My company knows about this arrangement and approved this temporary work relocation. I intend to move back to California next July when my company's offices are slated to re-open.

If you had moved out of the apartment in California and transferred everything to North Carolina, that includes changing your drivers license, car registration voter registration, and banking. The two states would have agreed it was permanent, and you wouldn't have had to count days in each state.

The problem is that if you didn't do any of these things and all documentation with the company shows it to be temporary, then California still considers you a resident, and they want their share.

COVID is what makes this more complex. The states have admitted that some people are working from states different than they normally do. The question is if North Carolina would look at the COVID situation and ignore your temporary presence in their state and not require you to send them tax money for the time you worked in their state.

COVID makes the usual rules more complex. In an aggressive state, one of the rules used to determine if they can tax the income is was the work being done in state X because it benefits the company. For example if you live in an aggressive state and do the work in a state with no income tax you would love to be able to say there is no state income tax to be paid. If you do the work in that state because that is where the warehouse is, then it benefits the company. But if you are sitting in a random coffee shop on your laptop, then doing it there doesn't benefit the company. But under COVID conditions people are working outside the office because it stops the spread, and that benefits the company.