Federal vs State Taxes for NRIs with Multi-State U.S. Exposure

(UNITED STATES) Indian-origin professionals with ties to multiple U.S. states are facing heightened scrutiny over where they owe state tax alongside federal income tax, as remote work, short-term projects, and cross-border moves blur traditional lines of residence and income source. Tax advisers say the most exposed group includes NRIs, Green Card holders, H‑1B workers, and digital nomads who live in one state but earn income in others, or who moved back to India while keeping U.S. income streams. The core problem is simple to state but hard to manage: the federal government taxes one way, while states each set their own rules, and the two systems don’t always line up.

Federal vs. state rules: the basic mismatch

At the federal level, the Internal Revenue Service applies uniform residency tests and taxes U.S. residents on worldwide income, while nonresident aliens owe tax only on U.S. source or effectively connected income. States do not follow a single playbook:

• Some states tax all residents on all income.
• Others tax only income earned within their borders.
• A few states have no state income tax at all.

That mismatch means an engineer who splits time between California and Texas, or a consultant living in New Jersey but advising New York clients from home, can find themselves filing several state returns even after filing a single federal return.

Who’s most exposed and why it matters

The result for NRIs and other cross-border earners is a widening compliance burden and the risk of paying tax twice on the same income if credits don’t line up cleanly. States can tax you because you live there, or because you earned income tied to that state. Even brief physical presence to perform work can trigger a nonresident return in some jurisdictions.

According to analysis by VisaVerge.com, confusion is most visible for people who:
– Move mid-year,
– Work remotely across state borders,
– Return to India while keeping U.S. clients and property.

Nonresident filing rules and practical examples

Tax researchers point to the spread of nonresident filing requirements as a major driver. The Tax Foundation notes many states require returns from nonresidents who earn income in that state, regardless of where they live.

Examples:
– A freelance designer based in Seattle who travels to film a project in Atlanta may face filings in both states.
– A software specialist in Boston performing work days in Denver may likewise have to file in multiple jurisdictions.

The policy goal is to let states tax income generated within their borders, but the practice often catches people off guard—especially those who assume their federal income tax filing covered the field.

Legal guardrails — Wynne and limits of protection

Legal protections exist but don’t remove complexity. In 2015, the U.S. Supreme Court in Comptroller of the Treasury of Maryland v. Wynne held that a resident state cannot tax out-of-state income without providing a full credit, because such a structure burdens interstate commerce.

• The Wynne decision requires states to design credits that prevent double taxation across state lines.
• The mechanics vary widely: some states offer broad credits, others apply narrow formulas that may not match a taxpayer’s facts.
• Mismatched rules can leave individuals reconciling after the fact.

Remote work and “convenience of the employer” rules

Remote work has added fresh friction. Several states apply “convenience of the employer” or similar sourcing rules, treating income as earned in the employer’s location even when the employee works from another state.

• A worker logging in from a different state may still owe tax where their employer is based.
• For NRIs who spent part of a year in the U.S. on H‑1B before returning to India, or who consult for U.S. entities from abroad while keeping a home or driver’s license in a state, overlapping residence-based and source-based taxation can produce multiple claims.

A practical scenario to illustrate stakes

Consider a Green Card holder who:
1. Lived in Illinois until June,
2. Moved to Texas for a new job,
3. Continued advising a California startup on weekends.

• Illinois could tax income earned while resident.
• California could tax income sourced to its state from consulting work.
• Texas imposes no personal income tax, but that doesn’t shield the taxpayer from other states’ claims.
• If the person later spends three months in India while keeping U.S. clients, a resident state might still claim tax on worldwide income if domicile wasn’t clearly changed.

Domicile and the “tie” indicators

Financial planners warn that domicile—the state you intend as your permanent home—often becomes the hinge for residency claims. Signs that influence domicile include:

• A home you keep
• Driver’s license
• Voter registration
• Mailing address

For NRIs who leave a U.S. job but retain a home base while consulting across states, those ties can trigger resident taxation on all income in the domicile state, plus nonresident returns in source states. Without timely steps to sever ties or establish domicile elsewhere, the tax footprint can grow quickly.

Real estate, investments, and passthrough income

This tension appears in investment and real estate income as well:

• An NRI who returns to India but rents out property in two different states may need to file in both states annually.
• A domicile state may still claim tax if ties persist.
• Credits may offset overlap, but resident states can deny or limit credits for certain income types.
• Partnership income flowing through a K‑1 or gig work during short visits can create similar multi-state filing needs.

Practical steps professionals recommend

Tax professionals say the harm is preventable with early, precise recordkeeping and proactive planning. Key actions:

1. Clarify your domicile by aligning documents, property, and intent.
2. Map each income stream to the state where the work was physically done or legally sourced.
3. Track day counts in every state and keep travel logs.
4. Document employer and client locations to support sourcing and residency positions.
5. Check how your resident state grants credits for taxes paid elsewhere and whether limits apply.
6. When changing states mid-year, plan timing to reduce overlap.

These steps matter especially where a state’s “day count” rule sets a filing trigger or a convenience rule applies and a taxpayer needs to show work was performed outside the employer’s state.

Federal baseline and common misconceptions

The IRS sets who is a U.S. resident for federal tax purposes through the Green Card test and the substantial presence test, and explains nonresident taxation on U.S. source income. Official guidance such as IRS Publication 519 sets out these federal categories.

Common mistake:
– Assuming federal residency status (resident or nonresident) decides every state question. A person can be a nonresident alien for federal tax yet face nonresident state filings if they earn income in a state, or even resident state claims if they maintain domicile.

Policy and planning implications for the diaspora

Policy voices in India say this “hidden layer” of state-level exposure deserves more attention in diaspora planning. Advisers helping NRIs return to India while keeping U.S. ties stress that ignoring state tax can undercut expected benefits of repatriation or remote work.

Small decisions can swing outcomes:
– When to switch a driver’s license
– How to time a lease
– Whether to spend two weeks on-site in another state

Case vignettes: routine choices becoming tax events

• A software developer who kept a condo in a high-tax state after moving abroad and continued coding for U.S. firms found the home state asserted resident status and taxed worldwide income, only partially crediting other states’ taxes.
• A researcher dividing time between two labs in different states filed in both, and needed a third return after a brief visiting teaching stint in another taxing state.

These are common patterns showing how fast multi-state exposure can stack up.

Bottom line: plan early and document thoroughly

Experts stress this is not a niche problem. The growth of cross-border careers means more people will fall into the gap between federal uniformity and state patchwork. That includes:

• Students shifting from OPT to H‑1B
• Spouses with part-time consulting across states
• Entrepreneurs incorporated in one state while working from another

Each scenario reinforces the core lesson: one federal income tax return rarely closes the book. The state layer sticks around, and for NRIs and other mobile professionals, it’s often the layer that hurts the most if ignored.

Key takeaway: Clarify domicile early, track days and work locations precisely, map income to sourcing rules, and check state credit mechanics — otherwise multiple state returns and unexpected tax bills can quickly erode the benefits of mobility or repatriation.