One of them most common inquiries (and error notices) I see is when residents are moving in or out of the District. State tax issues to consider are withholding taxes, tax credits and choice of state residency.
You may be required to file and pay taxes to your state of residency and state of domicile. State of domicile is the location where one permanently intends to reside, as evidence by factors such as property ownership, voting and car registration, and banking. A taxpayer may reside temporarily in one state and be domiciled in another, for example to start a new consulting job. The number of days spent in the state is an important factor when considering tax on residency.
In the District of Columbia, a taxpayer will owe tax if he or spends 183 days or more residing in the District, even if domiciled in another state. Stated another way, if one is domiciled in another state and spend less half the year residing in the D.C., no taxes will be due to the District as the taxpayer is not required to file.
State Tax Credit
If you reside in one state and owe taxes to your state of domicile, you may be eligible to take a credit for the tax paid to the other state. For example, if you move to D.C. in May and do not establish a new domicile here, you may take a credit for taxes paid to the District for any taxes paid to your state of domicile.
State Reciprocal Tax Agreements
Complications arise when a taxpayer lives in one state and works in another. Which state to pay? The District has a reciprocal tax agreement with border states Virginia and Maryland, with taxes being paid to the state of residency. A common problem I resolve is taxes withheld from wages to the improper state of residency. For example, a Virginia taxpayer who works in Virginia moves to the District and fails to adjust withholding to have D.C. taxes taken out of his paycheck. By the time the taxpayer files his taxes in D.C., no taxes have been paid to the District!
State tax issues are complex as a diligent review of each states tax code is required. States have different rates, tax and exclude items differently and have unique residency requirements. Contact a D.C. State Tax Attorney for a consultation to make sure you are completing your state returns correctly.