As a traveler mobilizes from assignment to assignment, they will occasionally have mail sent directly to one of the temporary travel nurse mailing addresses instead of having it forwarded from the main mailing address.
While this may be convenient, it is a recipe for trouble on the tax end. In our practice, we have seen the following scenarios that travelers should be aware of.
Retirement distributions are received during assignments.
Most financial institutions are required to designate the state in which any distributed retirement funds are sent. If you withdraw from your retirement funds or do a ROTH conversion, be sure to confirm that the financial institution is reporting the distribution to your home state.
When filing your annual tax return, it is a strong possibility that the 1099R that reports the distribution will be coded for the state of receipt and not your home state. Since most states take the position that the 1099 or W2 is correct unless otherwise documented or corrected, a traveler could be liable for taxes to that state on income they never earned there.
Residency Audits
State revenue audit departments often make the IRS look like a harmless fuzz ball. They will aggressively pursue the smallest shred of evidence that would suggest that a taxpayer is a resident of that state. Many of them have departments called “Discovery Units” or some title that makes them sound like military special forces.
Examples
The following are just a few examples of traveler’s cases that we have helped resolve.
- W2s are sent to parents’ addresses during a traveler’s move to another state. The parent’s home state assessed tax on total income for the year based on W2 address.
- Utilizing an out-of-state hospital for delivery. A resident of one state with family in another state chose to close out her pregnancy near her family. The state assessed the mother for full-year taxes, asserting that she was a resident since she used the hospital facilities.
- The traveler took a travel assignment in a state bordering their grandfather’s home state to care for him during off days during terminal illness. The traveler had their grandparent’s address listed on financial mailings for convenience. Grandfather’s state assessed travelers for taxes as if they were a resident.
- Using professional practice licenses as evidence of residency. Almost all states with an income tax now cross reference professional practice licenses and their tax return database. If no tax return is found during a year in which the license is active, letters are randomly generated to the last known address requesting an explanation or a return.
- Adjacent year return. Often, filing in a state for one year will trigger an expectation of a return the subsequent year regardless of whether any income was earned.
- Incorrect filing. A common mistake of chain tax companies and DIY travelers is claiming part-year residency in every state worked. This becomes a license issue. Compact state licenses require that a resident return be filed in the home state OR, if the home state does not have an income tax, that no other state has a resident filing.
What happened with these cases? Years later, travelers either discovered tax liens during loan applications or received notices that were sent to the wrong address. One locum client of ours had a six-year-old, $56,000 lien filed by the state of California. The traveler discovered the lien when applying for a mortgage.
Would you like to learn more?
Check out the TOP 10 Questions for Travel Nurses on Taxes.
