My wife and I have a home in Maryland, where we have historically claimed as our permanent residence, and a home in South Carolina. In order to reduce property taxes in South Carolina, my wife is thinking of changing her permanent residence to South Carolina. Won't this require us to file separate state tax returns? If so, will we have to file separate federal returns as well? Are there rules to follow for dividing our income or can we simply split 50/50?

You ask: "Won't this require us to file separate state tax returns?" Yes - but that's your objective, isn't it? You want your income to be taxed by MD and her income to be taxed by SC, presumably because SC's rates are lower than MD's, correct?

I assume you work in MD and will be spending more time living in MD than SC. Thus MD is your abode. It's possible for your wife to claim SC as her principal abode while you maintain MD as your abode, and hence she pays taxes on her income to SC instead of to MD. As a couple you can continue to file jointly for federal and separate for state taxes, but only if each spouse is a full time resident of their respective states and neither has any income sourced from the other state. So for you to do this:

1. Your wife must make SC her principal abode - which means she spends more time there than any other state, has her bank accounts there, uses SC as her address for all financial satements, and she does not have any joint accounts with you in NC. She should register to vote in SC and transfer her car registration to SC. She may visit the MD home, and treat it as a 2nd home (vacation home), but she must spend fewer nights in MD than during the year than in SC.

2. Similarly you must have no SC source income - no bank accounts there, etc. You may visit the SC home, but to maintain your MD residence you must spend less time in SC than MD.

Hope this helps. I guess the main question to you is whether your wife's income is sufficiently large to make this worthwhile.