Thanks for that additional info! I didn't even think about the state tax implications if I had chosen a different state. If I do something similar in the future and pick a state WITH income tax, how long would I need to work there before I'd have to file a tax return for that state?

It varies significantly by state. Some states require you to file a nonresident return from day one, regardless of how little you earn there. Others have minimum thresholds like working more than 30 days or earning above a certain amount. For example, New York technically requires nonresident income tax filing for any work performed in the state, even for a single day. Other states might have a 15-30 day grace period. Some have minimum earning thresholds ranging from $1,000 to $3,000 before you need to file. There are also a few states with reciprocity agreements where you might only pay tax to your home state.

This is a really good point! Seattle has that head tax thing that even non-residents have to pay sometimes. OP should check on local taxes for wherever they worked.

This is exactly what I needed - thank you! So if he's primarily moving his household and family, those expenses aren't deductible even if the reason for the move is business-related. But if he's also moving actual business property, that portion could potentially be deductible?

That's correct. The expenses for moving actual business property (like specialized equipment, inventory, business furniture, etc.) to the new location could potentially qualify as legitimate business expenses. Those would be reported on the business tax return. The personal household moving expenses remain non-deductible regardless of the business motivation behind the move. This is a common area where business owners often blur the lines, but the IRS is quite clear on maintaining the distinction between personal and business expenses. Your friend should keep meticulous records and separate receipts for anything that might qualify as a legitimate business expense versus personal moving costs.

Sorry you had to learn this the hard way. How did the audit go overall? Was it just a matter of paying the additional tax or were there penalties too?

California is super aggressive with this stuff. Generally, if your client is using your work product in CA, they consider the benefit received there. I had a similar situation with a national client and ended up having to apportion based on their customer breakdown. It's annoying, but I asked my client for the approximate percentage of their customers in California and used that to calculate the portion of my service income attributable to CA. My accountant said this was a reasonable approach since I had documentation from the client.

Wow, that's a really important distinction! So basically as a service business, we have even fewer protections than physical product sellers? That seems backwards considering we use even less of the state resources/infrastructure...

Yes, it's counterintuitive but that's exactly right. PL 86-272 was enacted in 1959, long before digital service businesses existed at scale. It specifically protects businesses that sell tangible personal property when their only activity in a state is soliciting orders that are approved and fulfilled from outside the state. Service businesses don't get this protection, which means you can potentially create income tax nexus more easily than a company selling physical products. Many tax professionals believe PL 86-272 needs to be updated for the digital economy, but until then, service businesses need to be especially careful about multi-state compliance.

How do the child tax credits work if you file separately? Do you each get to claim one kid or does only one spouse get to claim them?

With married filing separately, generally only one spouse can claim a qualifying child for the Child Tax Credit. You can't split the children between spouses like you might think. Additionally, if you file separately, the income threshold for the Child Tax Credit phase-out is lower than when filing jointly, so you might get reduced credit or none at all depending on your income. This is actually one of the biggest disadvantages of filing separately when you have kids - you potentially lose thousands in tax benefits compared to filing jointly. In our case, that was about $4,000 in various child-related tax benefits we would have partially or completely lost by filing separately.

The rule of thumb actually IS pretty simple: married filing jointly is better for about 95% of couples. The only major exceptions are: 1) One spouse has huge medical expenses 2) One spouse is on income-based student loan repayment 3) One spouse has previous tax issues (liens, back taxes, etc) the other wants to avoid 4) Couples in community property states with specific situations

Thanks for breaking it down like that! Makes more sense now why everyone keeps saying to use the joint filing. I guess I was hoping there would be some income threshold where it flips, like "if one spouse makes 3x more than the other, then separate is better" or something simple. Good to know that joint filing is almost always the default best choice. Will save me some time next year!

Thanks for this practical advice. I hadn't thought about doing it in TurboTax first and then just getting a review. That seems like a good middle ground between doing it all myself and paying the full price for preparation. Did your CPA find many errors when they reviewed your self-prepared return?

The first year, yes - my CPA found several issues. I had misunderstood how to enter some 1099-MISC income and had incorrectly calculated my home office deduction. The corrections actually increased my refund by about $800. In subsequent years, I've gotten better at using the software correctly, and now the review is mostly just peace of mind. The CPA usually just verifies everything looks right and occasionally suggests an additional deduction I might have missed. Most errors happen when your tax situation changes significantly - like in your case with marriage, home purchase, and dependents all at once.

This is such a good point about withholding! When I got married, we both kept our "single" withholding rates for most of the year and ended up with a massive refund that seemed wrong but was actually correct.