Home is Where the Heart is….or is it? Establishing Residency in a New State
With the hassle of planning an out-of-state move, taxpayers often overlook an important aspect—changing residency for state tax purposes.
Incorrectly or incompletely transferring residency can result in an audit or filing requirement in the taxpayer's former resident state. Properly establishing residence in a new state helps a taxpayer avoid these issues after moving.
States may tax the worldwide income of their residents. Generally, states determine residency by:
- statute (a permanent abode coupled with a minimum number of state days for any purpose); or
- domicile, a legal concept.
Statutory residency is an objective standard, and its determination can be relatively mechanical. For purposes of this article, we focus on domiciliary residency.
Domicile focuses on the individual's intent to make a permanent home, a subjective standard. Confusion arises when a taxpayer is considered a legal domiciliary of multiple states. In situations where a taxpayer moves from a high- to a low- or no-income tax jurisdiction, a former resident state may attempt to claim the taxpayer as a resident. A taxpayer often discovers, to his/her tax detriment, that once domicile is established in a state, changing it is difficult.
To establish domicile in a new state, a taxpayer must show he/she physically moved out-of-state, maintains a place of abode in a new state, and intends to remain in the new state permanently or indefinitely. States use a facts and circumstances test composed of several factors to determine whether a taxpayer is a resident domiciliary. None of these factors are determinative in and of themselves; instead, the focus is on a comparison and a weighting of the level and types of activities engaged in by a taxpayer in the two jurisdictions in question.
States give primary importance to five factors when evaluating domicile: home, active business involvement, time, items "near and dear," and family connections. States will consider other factors if the primary factors do not resolve the issue.
The location of a taxpayer's "home" is harder to determine when a taxpayer retains the old residence as a vacation home or hotel-substitute after moving to a new state. In these situations, states compare the original residence with the new residence to determine domicile. Whether the homes are owned or rented is not important. Aspects of the home that are important in this comparison are size, value, and nature of use. Size and value, especially, must be viewed in the context of the geographic area where the residences are located.
Domicile is more likely to remain with the original state if a taxpayer continues employment or active participation in a business located in the original state. A taxpayer may claim active participation in a business on his/her Federal income tax return in order to avoid passive activity loss limitations. However, if the active business is located in a taxpayer's former resident state, a state could argue the taxpayer never changed domicile. This can be mitigated if a taxpayer can show that most or all of the taxpayer's business efforts are performed in the new state. Passive investment in a business, though, located in a former resident state does not support an argument for or against domicile.
"Time" is a quantitative analysis of where a taxpayer spends time during the tax year. If the statutory threshold mentioned above is not met, "time" requires a subjective analysis. A comparison is made between where a taxpayer is required to spend time (i.e., work) and where a taxpayer chooses to spend time (i.e., vacation, leisure activities).
Items "near and dear" are those items with sentimental value, including book and art collections, family heirlooms, pets, and other personal items. Moving these items to the new state strengthens a taxpayer's claim of domicile in the new state. All the facts and circumstances must be considered. Thus, a taxpayer should account for "near and dear" items' sentimental and monetary values to the extent these items will be split amongst different abodes.
The final primary factor, family connections, focuses on the location of a taxpayer, a taxpayer's spouse or partner, and a taxpayer's minor children. In some cases, the definition of family expands to include adult children or elderly parents.
Cumulatively, a significant adjustment in a taxpayer's lifestyle clearly evidences domicile change. For example, spending an additional month in Florida every year is not as dispositive as moving to Florida with family heirlooms, buying a bigger home, and giving up active participation in a business in the former resident state.
Besides the primary factors discussed above, other factors that support domicile in a state include:
- Address where bank statements and bills are received;
- Location of safe deposit boxes;
- Location of vehicle registrations;
- Location of voter registration and participation in local elections;
- Public library cards;
- Social and athletic club memberships;
- Updating will to new state; and
- Use of professional services.
In their residency analyses, most states do not include charitable or political activities/contributions to organizations located in the taxpayer's former resident state.
Given the stagnation of the economy, and states' insatiable desire to grow their tax revenue bases, simply moving to another state may not change residency for state tax purposes. Without proper planning, a taxpayer may have two states claiming residency. However, with knowledge of the above factors, along with appropriate actions and detailed records, the residency transition can be painless.