Dual state question


F

Fearless

My daughter resides (owns a house) and works in Oregon. Her
fiance (they are to be married at the end of September),
resides (owns a house) and works in Washington. Oregon has
an income tax; Washington does not. Washington residents
who work in Oregon must pay Oregon income tax. Oregon
residents who work in Washington must pay Oregon income
tax. Neither my daughter, nor my future son-in-law have
portable jobs such that, for example, my daughter could
accept employment in a Washington branch of the Oregon
company. Similarly, her fiance works out of his home, is
required by his company to maintain a physical presence in
Washington (he is subsidized for using his home as the
company office). In practical fact, he spends 5 days every
week travelling around the west doing trouble-shooting for
his company (he's a chemical engineer).

The obvious question in here is the whole issue of residency
once they get married. Each owns property in their
respective state. My daughter's house is a 5 minute commute
from her office; her fiance's house would be a 75 minute
commute in each direction daily. There are no benefits to
my daughter to live in Washington (she would still pay
Oregon income tax and would have a 2.5 hour commute daily),
and there are significant consequences to her fiance for
actually residing in Oregon (exposing his income to Oregon's
9% income tax, losing the subsidy for his house as his
office, and requiring him to make a lengthy commute to
Portland International Airport every time he flies on
business (at least 3 times per week).

They would like to each maintain their separate residences
for the reasons mentioned above. What are (a) the federal
tax and (b) the Oregon state tax implications for a married
couple having separate residences in different states? Does
this affect how they can file federally? Can they file
jointly with two separate addresses? Oregon's income tax is
linked to the federal income tax and we haven't been able to
determine, yet, whether a couple who files jointly for
federal can file separately for the state.

They know they need to talk to a professional tax advisor
about this, but there are some other tax issues involving
real estate and rental property that are also involved and
so they are being careful and cautious in their search.

In the meantime, my own curiousity about their filing status
options motivates this post.

Thanks for your time and your consideration.
 
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K

Katie

Fearless said:
My daughter resides (owns a house) and works in Oregon. Her
fiance (they are to be married at the end of September),
resides (owns a house) and works in Washington. Oregon has
an income tax; Washington does not. Washington residents
who work in Oregon must pay Oregon income tax. Oregon
residents who work in Washington must pay Oregon income
tax. Neither my daughter, nor my future son-in-law have
portable jobs such that, for example, my daughter could
accept employment in a Washington branch of the Oregon
company. Similarly, her fiance works out of his home, is
required by his company to maintain a physical presence in
Washington (he is subsidized for using his home as the
company office). In practical fact, he spends 5 days every
week travelling around the west doing trouble-shooting for
his company (he's a chemical engineer).

The obvious question in here is the whole issue of residency
once they get married. Each owns property in their
respective state. My daughter's house is a 5 minute commute
from her office; her fiance's house would be a 75 minute
commute in each direction daily. There are no benefits to
my daughter to live in Washington (she would still pay
Oregon income tax and would have a 2.5 hour commute daily),
and there are significant consequences to her fiance for
actually residing in Oregon (exposing his income to Oregon's
9% income tax, losing the subsidy for his house as his
office, and requiring him to make a lengthy commute to
Portland International Airport every time he flies on
business (at least 3 times per week).

They would like to each maintain their separate residences
for the reasons mentioned above. What are (a) the federal
tax and (b) the Oregon state tax implications for a married
couple having separate residences in different states? Does
this affect how they can file federally? Can they file
jointly with two separate addresses? Oregon's income tax is
linked to the federal income tax and we haven't been able to
determine, yet, whether a couple who files jointly for
federal can file separately for the state.
For federal income tax purposes, if they are married at the
end of the tax year they may file a joint return, regardless
of where the spouses reside.

For Oregon income tax purposes, a resident is a person who
is either (a) domiciled in Oregon (unless such a person
maintains no place of abode in Oregon, does maintain a place
of abode somewhere else, and spends no more than 30 days of
the taxable year in Oregon) or (b) domiciled elsewhere but
maintains a place of abode in Oregon and spends, in the
aggregate, more than 200 days of the taxable year in Oregon.
Or. Rev Stats. Sec. 316.027(1)(a).

It appears that as it stands, your daughter is domiciled in
Oregon, and her fiance is domiciled in Washington. Their
marriage will not change the domicile of either of them. In
order to change domicile, an individual must have (a) the
specific intent to abandon the previous domicile; (b) the
intent to acquire a specific new domicile; and (c) actual
physical presence at the new domicile. Or. Adm. Reg. Sec.
150-316.027. So unless one spouse abandons his or her
existing home and moves in with the other, neither will
change domicile. After the marriage, the wife's Oregon
house could be attributed to the husband as a place of
abode; however, he will not be an Oregon resident for tax
purposes unless he spends more than 200 days of the taxable
year in Oregon. Beware: partial days count. Obviously he
should maintain a contemporaneous calendar recording his
location at all times. Since he travels a great deal on
business, it seems unlikely that he'll go over the 200 days.

In Oregon, if one spouse is a resident and the other a
nonresident, they must file separate returns unless they
elect to file jointly. On a joint return, income is
reported just as it would be if they filed separately; in
other words, the joint return includes all of the resident
spouse's income, from all sources, plus the Oregon source
income of the nonresident spouse. Probably they should
calculate their tax liability both ways (jointly, or the
wife filing MFS) to see which produces the better result.
There may be some benefit to filing a joint return.

There is one clinker here that you probably haven't thought
of. Oregon is a separate property state; Washington is a
community property state. The division of income between
spouses is determined by the laws of their respective states
of domicile. There are several Oregon Tax Court cases
holding that an Oregon domiciliary resident spouse must
include in Oregon taxable income his or her community 1/2 of
a Washington domiciliary spouse's earnings. So your
daughter's taxable income for Oregon purposes, whether
filing jointly or separately, would include 1/2 of her
husband's earnings, which are community income under
Washington law (though not until after the marriage, of
course). Harlan v. Dept. of Rev., 10 Or. Tax. 497,
11/23/1987; Keller v. Dept. of Rev., 9 Or. Tax. 67 (1981).
See also 2004 Oregon Publication 17, p. 36.

It may be possible, under Washington law, to make the husband's
earnings his separate income via a prenuptial or postnuptial agreement.
However, there are other implications to giving up one's community
rights in one's spouse's income, and that is usually not a decision
that should be made solely for state income tax purposes. If your
daughter and her fiance want to look into it, they should consult a
Washington attorney.

Katie in San Diego
 
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P

Phil Marti

Fearless said:
My daughter resides (owns a house) and works in Oregon. Her
fiance (they are to be married at the end of September),
resides (owns a house) and works in Washington. Oregon has
an income tax; Washington does not. Washington residents
who work in Oregon must pay Oregon income tax. Oregon
residents who work in Washington must pay Oregon income
tax. Neither my daughter, nor my future son-in-law have
portable jobs such that, for example, my daughter could
accept employment in a Washington branch of the Oregon
company. Similarly, her fiance works out of his home, is
required by his company to maintain a physical presence in
Washington (he is subsidized for using his home as the
company office). In practical fact, he spends 5 days every
week travelling around the west doing trouble-shooting for
his company (he's a chemical engineer).

The obvious question in here is the whole issue of residency
once they get married.
The hopeless romantic in me says they couldn't bear to live
apart, but I guess I haven't kept up with progress.
Each owns property in their
respective state. My daughter's house is a 5 minute commute
from her office; her fiance's house would be a 75 minute
commute in each direction daily. There are no benefits to
my daughter to live in Washington (she would still pay
Oregon income tax and would have a 2.5 hour commute daily),
and there are significant consequences to her fiance for
actually residing in Oregon (exposing his income to Oregon's
9% income tax, losing the subsidy for his house as his
office, and requiring him to make a lengthy commute to
Portland International Airport every time he flies on
business (at least 3 times per week).

They would like to each maintain their separate residences
for the reasons mentioned above. What are (a) the federal
tax and (b) the Oregon state tax implications for a married
couple having separate residences in different states?
There are no Federal consequences, except they can have a
less than delightful argument about which address to use if
they file jointly. I recommend a coin toss.
Does
this affect how they can file federally? Can they file
jointly with two separate addresses? Oregon's income tax is
linked to the federal income tax and we haven't been able to
determine, yet, whether a couple who files jointly for
federal can file separately for the state.
That's the unresolved question, and the only pertinent one
since WA doesn't have an income tax. Residency is
determined by the state's rules, not by what address is on
the return. They'll need to check to see what the effect
would be if OR requires them to file a joint state return if
they file a joint Federal return. Married, Filing
Separately is also an option.
 
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F

Fearless

Thanks for your very helpful reply. One followup. Suppose
my daughter moved to Washington and established her
residency and domicile there, yet continued to have all
income Oregon sourced. Obviously her income would be
subject to Oregon tax, though she's a non-resident. Would
this continue to expose 1/2 her husband's income to Oregon
tax? It seems like this is a no-win situation for them if
Oregon is going to tax her 1/2 of her husband's income
whether she lives in Oregon or not.

They both make large incomes and the Oregon tax consequences
of his income (or even half his income) is quite sizeable,
though certainly better than if all of it were taxed.

Thanks again.
 
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K

Katie

Fearless said:
Thanks for your very helpful reply. One followup. Suppose
my daughter moved to Washington and established her
residency and domicile there, yet continued to have all
income Oregon sourced. Obviously her income would be
subject to Oregon tax, though she's a non-resident. Would
this continue to expose 1/2 her husband's income to Oregon
tax? It seems like this is a no-win situation for them if
Oregon is going to tax her 1/2 of her husband's income
whether she lives in Oregon or not.

They both make large incomes and the Oregon tax consequences
of his income (or even half his income) is quite sizeable,
though certainly better than if all of it were taxed.
She would need to dispose of her Oregon home and sever all
her ties to Oregon except for commuting to her job. She
would no doubt be in Oregon for more than 200 days of any
taxable year, so she could not maintain a place of abode
there without being considered a resident, even if Oregon
agrees that her domicile change is valid.

If she made a valid change of domicile to Washington, and
did not maintain a place of abode in Oregon, she would be a
nonresident subject to Oregon tax only on her Oregon
earnings. Her community 1/2 of his Washington earnings
wouldn't come into it.

It's a cost-benefit analysis -- how much would it cost (not
just in money but in commuting time, etc) vs. the tax
effect. And as long as she continues to work in Oregon she
would be at some risk. But if his income is substantial, it
may be worth the cost and effort.

Katie in San Diego
 
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F

Fearless

I'm just being a nosy and helpful father here. My daughter
and future son-in-law are having these conversations with
both a CPA and with a lawyer, but while the answers they are
getting mirror yours, they seem so much longer and
convoluted than your much simpler explanations (or they
can't tell me in plain english - another possibility -
because they're not liking the answers they're getting).

In any case, one last question whose answer still eludes ME.
Does "disposing of her Oregon home" mean literally selling
it, or could she keep it and rent it out for investment
purposes? The rental market is quite strong and her house
(a townhouse actually) would be perfect as a rental.
 
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K

Katie

Fearless said:
I'm just being a nosy and helpful father here. My daughter
and future son-in-law are having these conversations with
both a CPA and with a lawyer, but while the answers they are
getting mirror yours, they seem so much longer and
convoluted than your much simpler explanations (or they
can't tell me in plain english - another possibility -
because they're not liking the answers they're getting).

In any case, one last question whose answer still eludes ME.
Does "disposing of her Oregon home" mean literally selling
it, or could she keep it and rent it out for investment
purposes? The rental market is quite strong and her house
(a townhouse actually) would be perfect as a rental.
Well, the more ties you sever, the better off you are, and
the more you keep, the more exposure you have. Keeping it
as a rental unit would not be fatal, since it wouldn't be
HER place of abode if it is rented to someone else. But
it's a retained connection to the old domicile. The
longer-term the lease, the better, and better that it is not
rented to a "friendly" tenant -- e.g., a friend or relative
-- who would welcome your daughter as an overnight guest.
I'd advise her to maintain detailed records to document a
businesslike approach to the property, including her
relationship with the tenant. Hiring a local management
company to manage the property would be a good idea.

Katie in San Diego
 
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K

Katie

Fearless said:
Thanks for your very helpful reply. One followup. Suppose
my daughter moved to Washington and established her
residency and domicile there, yet continued to have all
income Oregon sourced. Obviously her income would be
subject to Oregon tax, though she's a non-resident. Would
this continue to expose 1/2 her husband's income to Oregon
tax? It seems like this is a no-win situation for them if
Oregon is going to tax her 1/2 of her husband's income
whether she lives in Oregon or not.

They both make large incomes and the Oregon tax consequences
of his income (or even half his income) is quite sizeable,
though certainly better than if all of it were taxed.
She would need to dispose of her Oregon home and sever all
her ties to Oregon except for commuting to her job. She
would no doubt be in Oregon for more than 200 days of any
taxable year, so she could not maintain a place of abode
there without being considered a resident, even if Oregon
agrees that her domicile change is valid.

If she made a valid change of domicile to Washington, and
did not maintain a place of abode in Oregon, she would be a
nonresident subject to Oregon tax only on her Oregon
earnings. Her community 1/2 of his Washington earnings
wouldn't come into it.

It's a cost-benefit analysis -- how much would it cost (not
just in money but in commuting time, etc) vs. the tax
effect. And as long as she continues to work in Oregon she
would be at some risk. But if his income is substantial, it
may be worth the cost and effort.

Katie in San Diego
 
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