Did you move in 2021? Whatever the reason for your move – new job, caring for family, downsizing, or getting more house for your money – it’s time to think about tax implications. The state where you live can significantly impact your taxes – here’s a look at some of the essential considerations for your 2021 tax filings and 2022 tax planning.
STATE TAX FILINGS
The more states you live and earn money in, the more tax filing you’ll have to do. The basic rules on this are the same regardless of how many times you move, though moving multiple times can make things more complicated. For instance, if you lived in 3 different states for parts of last year, you may have to file three separate state tax returns.
A state may treat you as a full-year resident and tax you on all your income, even if you did not live there the whole year. This could happen if you spent at least 183 days in that state or your “domicile” in the state. Domicile is a fancy way of identifying your true home – the place you keep your family relationships and intend to go back to in the future. Temporary moves due to COVID-19 or other reasons don’t change your domicile if you mean to go back when all is said and done.
There are some tips to consider if a state ever conducts a residency audit, which many states pursue. First off, keep careful records that show when you moved. For instance, keep track of the dates you moved and keep backup for your records (sale documents, receipts for moving expenses, and so on). Also, keep records of when you earned income, such as pay stubs.
Second, to avoid having a previous home treated as a “domicile,” consider putting it on the market or renting it out, if possible, to show it is no longer your home or you are physically not living there. Homes sold faster in 2021 than any time in recent history, according to Zillow. With a record low inventory, you may make more money selling your home now than you thought. Other ways to show your primary ties are now in another state, obtain your driver’s license and register to vote in your new state.
To avoid double-taxation, each state provides a credit for taxes paid to other states while you lived in that state. Make sure you claim these credits. A tax professional can help you determine the exact amount of these credits.
Did you work remotely during 2021 outside of your state of residence but didn’t officially move? Things could get complicated, depending on where your permanent residence is and where you’ve been working remotely. A good example would be if your office is in Boston, but you’ve been working remotely from your home in New Hampshire, Massachusetts still wants a piece of your income tax. More on that here from Jean…
HOME OFFICE TAX BREAKS
What will moving into a new home office mean for your taxes? If you own a small business, make it a point to use part of your new home solely for business purposes. If you can do this, then you can deduct part of your home expenses such as utilities, insurance, mortgage interest, and real estate taxes against your business’s income. For instance, if you use 10% of your new home solely for business, you can deduct 10% of your home expenses. Setting aside even a small part of your home as a dedicated space for your business – a spare room or a corner of your living area – could result in significant tax savings.
If you rented a home last year, the rent is not deductible on your Federal tax return. This could be an unpleasant surprise for those of us who previously owned a house and were able to deduct mortgage interest and real estate taxes. However, keep an eye on state-by-state tax breaks, as some states allow you to deduct part or all of the rent you paid, such as New Jersey or Massachusetts. Your tax preparer can advise.
MORTGAGE INTEREST – LIMITS
If you took out a new mortgage when you moved, see if your mortgage interest is entirely deductible or not. The IRS provides a deduction on interest up to the first $750,000 of debt (different limits may apply if you have a mortgage balance from before December 15th, 2017). If your mortgage is over this amount, it may make sense to pay it down more aggressively in order to reduce the amount of interest you pay.
It’s a good idea to keep your tax professional informed about your moves and any significant changes that occurred in 2021 and see what they can do to help plan around that and save you money.
MORE ON HERMONEY:
- This List Will Save You on Tax Prep This Year
- Tax Filing Tips for Women Who’ve Gone Through Some Stuff
- What To Do If You Can’t Pay Your Tax Bill
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