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Residency and state income taxes, part 1: times a-changing'

We've written a lot in this blog about Uncle Sam's efforts to tax income that U.S. taxpayers make in foreign countries. Stepped-up U.S. enforcement actions have had major implications not only for those with offshore accounts, but for financial professionals and institutions as well.

But as important as it is, foreign income is not the only significant tax issue involving residency. There is also the question of when states can impose taxes on people who are not year-round residents.

It's an issue we've been following for some time. Nearly a year ago, in our December 18 post last year, we noted a proposal in the U.S. Congress to bring more consistency among states on tax obligations for people who work (and hence earn income) in one state but live in another. That proposal, called the Mobile Workforce State Income Tax Simplification Act, was referred to committee and has not passed.

In this two-part post, we will update you on the status of nonresident taxation issues. In part one, we will provide some national context. In part two, we will discuss how residency issues can affect taxes for people and businesses in California.

Forbes reported this week that enforcement by states of laws that attempt to tax the income of nonresidents has been increasing recently. This increase is at odds with the historical norm, which has shown a general tendency toward noncompliance with nonresident tax requirements.

There are very understandable reasons for the tendency towards noncompliance. One reason is lack of awareness that taxes can be imposed by state where someone doesn't live. Another is the administrative difficulty with tax withholding involving multiple states.

But things are Changing. It isn't only athletes, entertainers and assorted salepesople who frequently for work. More and more people are now telecommuting, living in one state and working remotely in others. States have also become more aggressive in taxing mobile workers. In part two of this post, we will address the effect this can have in California.

Source: Forbes: Nonresident Income Taxes - Not Just For Professional Athletes," Cara Griffith, Dec. 1, 2014

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