Many people choose to move out of New York, New Jersey, Connecticut, Massachusetts and other high-tax states to Florida, Texas, New Hampshire and other states without a personal income tax. If this is something a taxpayer is considering, it is crucial, for tax purposes, that the client understands the rules that will affect his or her ability to establish a residency or domicile in a new state, as an income tax audit may follow them after their claimed move.
DOMICILE vs. RESIDENCY
It is important to understand the difference between “domicile” and “residency.” “Domicile” refers to a taxpayer’s primary and permanent home, of which a taxpayer can only have one, and which is considered primarily in the context of estate taxes. A taxpayer can, however, have more than one “residence” as s/he may have homes in more than one state.
RESIDENCY FOR INCOME TAX PURPOSES
Under the law of most states, residency and personal income tax is established through one of two tests. The first test is based upon the domicile of the taxpayer. If the taxpayer is considered to be a domiciliary of a state, the taxpayer will be subject to that state’s income tax if it is their sole home. The second is whether the taxpayer is considered a “statutory resident,” for which the taxpayer may also be subject to that state’s income tax.
DOMICILE
It is the burden of the taxpayer to prove by clear and convincing evidence that s/he has left his or her domicile and established a different domicile. This is also known as the “leave and land test”. Since the determination of domicile is so heavily based in a taxpayer’s subjective intent, states have established several objective factors that auditors can utilize. The main factors are: time, housing, possessions, business ties, and family ties. The auditors will look at each of these factors in relation to both the old state and the new state, and must establish that the taxpayer has “left” one domicile and “landed” in the new state. It is not enough to do only one or the other.
Time is often considered to be the most important factor during the audit. The amount of time spent in the old state and the new state will be analyzed. An auditor will not only look at the amount of time spent in each of these locations, but will also examine it through the quality of the time (special occasions, holidays, visits with family and friends). Auditors will also examine the size and market values of the homes in each location, and where the taxpayer keeps his or her most valuable and most sentimental possessions. They will examine where the taxpayer is primarily conducting business, as well as where his or her spouse and any minor children live.
In addition to these primary factors, auditors may also look to additional factors such as:
• The address where bank statements, bills, and other correspondence are primarily received;
• The physical location of safe deposit boxes;
• Driver’s license and vehicle registrations including cars, boats, and airplanes;
• Where the taxpayer is registered to vote, and where the taxpayer exercises such right.
For a more complete list of factors, please refer to our Residency vs. Domicile checklist here.
STATUTORY RESIDENT
Simply proving a changed domicile may not be enough to stop the state of origin from taxing a taxpayer’s world-wide income, if s/he is still found to be a statutory resident. Most states will consider taxpayers to be statutory residents if they maintain a permanent place of abode in the state and spend more than 183 (full or partial) days there during the tax year.
Any dwelling can be considered a permanent place of abode (“PPA”) for the purposes of this statute, and it does not matter whether the taxpayer rents or owns it. Additionally, ownership of the PPA plays very little into the decision, as it does not matter if the PPA is in the name of the taxpayer’s limited liability company, a corporation, or a trust; it will even still be considered to be a PPA of the taxpayer has the right to stay the night whenever they want.
If you are considering a move from a high-tax state, consult with an attorney before your move, as this article only touches on the highlights of residency and domiciliary rules. Our attorneys have experience with many such cases and can help mitigate your risk.
