Changing Your State of Residency for Tax Purposes Can Be Tricky

My blog below was prepared with the assistance of Barry Horowitz, CPA, MST, partner in charge of the state and local tax group at WithumSmith+Brown, PC.

Just spending a few days a year in a certain state or having property there does not necessarily qualify you as residing in that state for the purposes of state income, estate and inheritance taxes. There are strict rules that determine whether you qualify.

In many states, an individual can qualify as a resident for tax purposes under either of two sets of circumstances. He/ she can qualify if…(a) “domiciled” in that state (see definition below) or (b) maintaining a permanent place of residence in the state and spending more than 183 whole or partial days during a given tax year in that state. State tax agencies aggressively audit the residency requirements, so it is important to follow the rules carefully.

Many states have detailed definitions regarding whether a person is or is not considered domiciled in their jurisdictions and/or is a resident. The person is not considereda “resident” for personal income tax purposes if he/she does not maintain a permanent place of abode in the jurisdiction during the taxable year…does maintain a permanent place of abode outside the jurisdiction during the entire year…and does not spend in the aggregate more than 30 days of the taxable year in the jurisdiction.

Domicile is viewed as a “state of mind” rather than just a physical presence, while “residence” is based on specifics about where the person is physically during the year. Here are some of the questions to consider regarding whether that state of mind qualifies you as having a domicile in a state…

• Where do you really want to live, and where is your “home?”
• Where do you want to spend most of your time, and where do you spend your time?
• Where are your most precious and important possessions (near and dear items) kept?
• Where are your business interests located, and how active is your participation?
• Where does your family live?
• Where are your primary physicians located?

When you establish a new domicile, you should consider doing the following…

• Change your car registrations.
• Change your driver’s license.
• Change your voter registration, and vote in the new domicile.
• Change the address on your passport.
• Establish memberships with religious institutions in the new area.
• Establish social affiliations such as country clubs, dining clubs and other groups.
• Move personal items including near and dear possessions, which can include family photo albums, mementoes and valuable art.
• Adjust insurance policies to show your primary address in the new state.
• File for homestead exemption, if applicable.
• File an affidavit of domicile in the new state, if applicable for that state.
• Execute a new will and any applicable trusts with an attorney in the new state under that state’s laws.
• Change credit card billing addresses.
• Open local bank and brokerage accounts, and change all account addresses to your new address.
• If you use a safe-deposit box, open one in the new jurisdiction.
• File nonresident tax returns in the state you moved out of if you have business or employment income from that state.
• Buy municipal bonds from the new state, and drop investments in bonds from the previous state.

Failure to do most of these items will cause the jurisdiction to question whether you have really changed your domicile. Each taxpayer’s situation is different, so adapt the list to suit your circumstances. Also, timeliness of acting is important. Delays indicate a lack of desire to make any change permanent.

Even if the jurisdiction agrees that you have changed your domicile, the 183-day statutory residence test applies. If you end up being audited for residency, every day has to be accounted for. In some cases, that could be extremely hard to do. Also, proving a negative is very difficult, so taxpayers should keep contemporaneous diaries or detailed schedules. Third-party documents such as cell-phone records, supermarket and credit card receipts, bills and airline tickets should be kept in order to verify where you were. The burden of proof for this is always falls on the taxpayer. Remember, any part of a day (with certain exceptions) in a jurisdiction counts as a day for residency purposes. The consequences of not having adequate records can be very expensive.

It is also possible to be deemed a resident of more than one state or jurisdiction if residences are maintained in more than one jurisdiction, thus making recordkeeping even more important. This can lead to double taxation, onerous penalties and costly professional fees to contest such assessments. Also note that, depending on circumstances, spouses do not have to be domiciled in the same state.

Many tax returns where a change of residence has occurred will likely be reviewed and possibly audited by the taxing authorities. Like all tax matters, planning and compliance must be done early, properly and thoroughly and not started only when a response is necessary to a challenge by a taxing authority.

For more information, check out Edward Mendlowitz’s website, or click here to purchase his book, Managing Your Tax Season.