The complexity of state income taxation has increased significantly over the past decade. The expansion of remote work, the rise of multi-state property ownership, the proliferation of state-specific entity rules, and the aggressive pursuit of cross-state tax revenue by individual state governments have combined to create a multi-state tax landscape that most taxpayers handle reactively rather than strategically.
AE Tax Advisors has built specific expertise in multi-state tax planning as one of the firm’s core service categories. The work is structurally different from federal tax planning, state tax codes vary significantly, the apportionment rules differ across jurisdictions, and the interactions between state residency, income source, and entity structure produce planning opportunities (and pitfalls) that federal-only planning cannot address.
The most common multi-state tax situations the firm works through include several distinct categories.
The first category is W-2 income earned across multiple states. A professional who lives in one state and works in another faces the resident state’s tax on their worldwide income, the work state’s tax on the income earned there, and a credit mechanism that prevents (or in some cases fails to prevent) double taxation. The interactions can produce significantly different outcomes depending on the specific state pair, the residency rules of each state, and the source rules each state applies.
The second category is remote work tax exposure. The post-2020 expansion of remote work has created complex situations where employees work in states other than where their employer is headquartered. Some states tax the income based on where the work is performed (most). Some states tax based on where the employer is located (a smaller number, under specific “convenience of the employer” rules). The mismatches between source state and resident state rules can produce double taxation if not planned for, and AE Tax Advisors works with remote-working clients to structure their work locations, document their physical presence, and file the appropriate state returns.
The third category is real estate income across states. Rental property owned in one state by a resident of another state produces income that is generally sourced to the property’s state. The resident state typically taxes the same income with a credit for taxes paid to the property state. The planning involves understanding which state’s rules apply to each component of the rental income, how cost segregation depreciation interacts with state specific depreciation rules (which sometimes diverge from federal rules), and how to optimize across the state pairs involved.
The fourth category is business income with multi-state operations. A business owner with operations, customers, or employees in multiple states faces nexus determinations, apportionment calculations, and entity-level state tax that vary significantly across jurisdictions. AE Tax Advisors works through the nexus and apportionment analysis to ensure the business is filing where required and optimizing across the jurisdictions involved.
The fifth category is equity compensation in multi-state contexts. Tech professionals who receive equity from a company headquartered in one state but who work or have worked in multiple states face complex sourcing rules. RSUs vesting after a relocation can be partially sourced to the prior state under specific rules. Deferred compensation distributions to a relocated executive can be subject to multi-state taxation under the so-called “source state” rules. The planning around these situations is significantly more complex than typical multi-state work.
The sixth category is residency planning. For high-income clients considering a move to a lower-tax state, the residency change must be executed correctly to actually achieve the tax benefit. States like California, New York, and others actively challenge residency changes by high-income former residents and can impose tax for years after the purported move if the residency change is not properly documented and executed. AE Tax Advisors works with clients planning residency changes to structure the move correctly, physical presence documentation, domicile change indicators, financial relationship transitions, to ensure the new residency is defensible if examined.
AE Tax Advisors integrates the multi-state work into the broader strategic tax planning relationship that the firm operates with each client. The annual $7,800 advisory engagement includes the multi-state analysis, the ongoing monitoring of cross-state income across the year, the coordination with the client’s local CPAs and attorneys where state-specific implementation is required, and the planning for any anticipated multi-state events.
The firm’s team, IRS Enrolled Agents and licensed CPAs led by Christina Nortman, has built specific expertise across many state tax codes and has structured its virtual advisory model specifically to serve clients with multi-state exposure. The 3-Year Tax Lookback that begins every engagement specifically evaluates whether prior multi-state filings were optimally structured.
For business owners, professionals, and investors with income or property in multiple states, the AE Tax Advisors multi-state planning capability is one of the more substantive resources currently available in the tax advisory category. The complexity is real. The savings opportunities are significant. And the technical expertise required to execute the work properly is exactly what AE Tax Advisors has built around this category.
Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial, tax, or legal advice. While the article aims to highlight common strategies and trends, it does not consider individual circumstances. Readers are encouraged to consult with a qualified professional for advice tailored to their specific situation.
