New: Partial DC and MD Income Tax

Because of the length of the last conversation on this subject and thinking I have a solution consistent with some of your feedback, I thought I would repost the situation and my plan:
Situation:
My daughter continued to live with my wife and me in Maryland after graduating college in May 2019, started working for a company in Washington, DC in June 2019, through December 31, 2019.
On January 1, 2020, my daughter signed a lease and moved into an apartment in Washington, DC, and updated her withholding to withhold DC income tax.
In mid-March, due to COVID-19, her company went to mandatory telework. As she obtained the apartment only to significantly ease her commute, and due to perceived higher risk of COVID in the city, she returned to our home in Maryland at that time. Once she left the apartment around March 15, she did not desire to return to live there unless the company would have mandated a return to the office to work, which has not happened.
She continues to pay rent and utilities on her DC apartment even though she has not spent one night there since mid-March. She continues to have DC income tax withheld.
Her company just informed employees that they are going to encourage telework through at least the remainder of calendar year 2020. As a result, she is signing a new agreement with her apartment management company, her former roommate, and a new person who will sign a new lease and take over for her in the apartment. This frees her from the lease effective August 1.
Plan:
DC will consider her a "statutory resident" having "maintained an abode" (the apartment lease from January 1 through July 31) for more than 183 days. Accordingly they will hold her liable for DC income tax on her entire year income.
MD will consider her a "part-time resident" from August 1 - December 31, 5 months.
She will first complete a MD return. It will include her wage income only from her 8/15 paycheck through her 12/31 paycheck. Her MD AGI will be based on wages earned from August through December, not her Federal AGI, plus the portion of her Federal AGI for unearned income in Maryland, including her MD tax refund from her 2019 return. She will then subtract the MD tax refund under Subtractions. She will subtract 5/12 of the standard deduction and 5/12 of her exemption, then the MD and local tax will be computed.
She will then complete a DC return. It will be based on her entire year wages, plus unearned income while the lease was in force, including taxable dividends. It will not include her MD tax refund as this is MD income. Tax will then be computed on this net amount less DC deduction. She will attach her MD return, show the amount owed, and indicate this as a tax credit for taxes paid to MD. She will be liable to DC for the DC total tax less the tax owed to MD.
Based on this, she has already had withheld to date to DC more than the tax liability to DC and will be due a refund when she files in February 2021. She will be updating her withholding from DC to Maryland at a level consistent with the amount of tax due to MD at the end of the year.
Sound right?
Reply to
Dimitrios Paskoudniakis
You really need to find a tax pro that is familiar with the tax law of the two government entities. What you are missing is your daughter's intent. But let me first explain what you asked about earlier. When we discuss who is a resident we mean for tax purposes how is the state treating you. If you are a tax resident, then they can tax you on your worldwide income. If not a resident, they can only tax you on income sourced to that state. Every state treats you as a resident if you are domiciled in that state. You can only have one domicile at a time. It is your permanent residence, the one place you always intend to return to whenever you leave it. You can be domiciled in a state for the whole year and never set one foot in that state because your absence was temporary and you did not plan to permanently relocate to that other place because you planned to return to your permanent home.
Each state would love to tax you on your worldwide income and as such wants to find a way to treat you as a resident even if you are not domiciled in that state. Another reason for having more than one definition that relates to being a resident is to ensure that people are not trying to game the system. So... they all tend to have another set of rules that define who is a tax resident. These rules take the form of either: feet on the ground for x number days, feet on the ground for X number of 24 hour days, feet on the ground for x number days and you maintain an abode for x number of days, etc, etc. with all kinds of variations. Before I forget, an abode is nothing more than a dwelling that is suitable for using as your home. Some states just say that if you are present in the state for any reason other than one that is temporary or transitory, you are a resident. Then you need to have some rules, regulations or court opinions on defining what the heck those words mean. Typically, it means if you moved there for an open ended period of time or for a period of time that exceeded one year, you are a resident. Otherwise, you are there only temporarily and not a resident.
So... what was your daughter's intent on 1/1/20 when she decided that living in MD and commuting to D.C. needed to change to living and working in D.C.? Did she change domiciles or did she just relocate temporarily to see if she liked working there but she kept MD as her one true home. If she did change domiciles, then what was her intent when she relocated back to MD in mid-March? Was she changing her domicile once again or was she just temporarily relocating back to MD until it became clear that she would never return to living in DC or was the ending the lease in DC the point when it became clear that the move back to MD was then made permanent?
Or was it her intention to never change domiciles from MD to DC. Obtaining the lease in DC was for convenience and she always intended to keep MD as her one true home?
I repeat, find a tax pro that understand this and make sure you discuss what her intent was when she first relocated to DC and then subsequently relocated back to MD. Hopefully this person will understand any subtleties to the DC statute on maintaining an abode in DC for at least 183 days and no mention of physical presence.
Reply to
Alan
Thank you.
When my daughter signed a lease for one year for an apartment in DC on January 1, 2020, it was her intent to remain in the DC apartment for the duration of the lease. Her intent in living in DC was to have an easy commute to her office, compared to over 90 minutes each way from my house. When her company went to mandatory telework on 15 March, her intended need for the apartment ceased on that day, pending an announcement from her employer to resume in-person work at their office. When she returned to my MD home, her intent was to return to her DC apartment during the remainder of the one-year lease period only if and when her employer mandated return to work at their office. Therefore her intent was in flux from mid-March when her employer announced telework until further notice, until a couple of weeks ago when her company announced telework through the end of the year. At that time, her intent is to stay in MD. As a result, she just executed a termination of her DC apartment lease effective August 1.
I have spoken to different tax pros and they each stated the same thing, opposite to this plan - to declare as a full-year MD resident, and file a DC-40 to claim a full refund.
I then spoke to DC OTR and MD Comptroller and they each said the same thing, opposite to the tax pros - the scenario I described as the 7-month lease (>183 days) counts as statutory DC residency (even though she domiciled in MD since mid-March), file MD as partial resident August - December, then file DC attaching the MD return, computing a full year of DC tax, minus the MD tax owed on the MD return.
I will consult more tax pros, but I'm sure I will get differing intepretations.
Reply to
Dimitrios Paskoudniakis
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When you consult with the additional tax professionals, if you get am opinion that differs from the DEC OTR/MD Comptroller opinions, ask them why they making the recommendation they are. Their explanations will help you make your final choice.
Ira Smilovitz, EA Leonia, NJ
Reply to
ira smilovitz

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