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Avoiding the Risk of Double Taxation at the State Level

By Kenneth H. Bridges, CPA, PFS    December 2019

Most states tax their residents on their worldwide income, while permitting them a credit for taxes paid to other states, so long as the effective rate paid to the other state does not exceed the effective rate paid to the state of residence on that same income.

We advise our clients who are residents of a state like Georgia with a state income tax and who may have meaningful exposure to tax of other states that they are generally better off to go ahead and file with the other state(s) and pay the tax, since they can generally get a credit for such against the tax of their state of residence (with the result being that often the only net out of pocket cost to them is our fees to prepare the other returns); whereas if they do not file with the other state and the other state assesses them years down the road, then they will incur penalty and interest and potentially miss out on the opportunity to claim the OSTC (other state tax credit) against their state of residence tax.  This risk was made clear in a recent Mississippi case (Kansler v Mississippi DOR).

The Kanslers moved from New York to Mississippi in 2007, and filed returns as Mississippi residents for 2008 and 2009.  In 2014, New York assessed the Kanslers tax for those years on a portion of the same income they had reported on their Mississippi returns.  The Kanslers paid the New York tax, and then sought a refund from Mississippi of $257,140.  The MS DOR denied the refund request, because the 3-year statute of limitations for making a refund claim had expired.  The Mississippi Supreme Court upheld the MS DOR’s position, and the US Supreme Court recently declined to hear the case.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.