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Residency and state taxes, part 2: proposed federal law has not passed

In the first part of this post, we discussed some of the detailed rules on residency status affecting state income tax returns. We focused, in particular, on part-year residents and what state tax obligations they may have in Massachusetts.

In today's post, let's look at how states tend to treat people who live in one state but earn income in another. More specifically, we will take note of a proposed federal law to encourage more uniform standards for this type of taxation.

The proposal we are referring to is the Mobile Workforce State Income Tax Fairness Act. It is has been introduced several times in Congress in recent years. Though it has not yet passed, Congress has held detailed hearings on it.

The proposed law would impose limits on the authority of state and local governments to impose taxes on mobile workers. If you are an employee with income from multiple states, you could face income tax in both your state of residence and another state (or states). But this would occur only if you were physically in the other state working there for a specified amount of time. In each tax year, that amount of time would be more than 30 days.

The 30-day guideline would bring much greater clarity to the law because states vary considerably on how they tax - or try to tax - out-of-state residents.

Historically, taxing out-of-state employees is not something many states have made a priority. In part, this is because of the logistical challenges for both employers and employees. For employers, it can be difficult to determine withholding obligations for work that employees do in other states.

As an employee, you may be able to take an income tax credit in your state of residence for taxes you paid to other states for work performed there. But as a Forbes contributor noted in a recent article, having to deal with multiple returns is obviously a hassle.

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