States tax residents who say they’ve moved elsewhere

By Laurie Samay

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Suppose you own two houses: one in a state with an income tax, such as New York, and another in an income-tax-free state, such as Florida or Nevada, where you spend an increasing amount of time. You’re ready to assert you primarily reside in the tax-free state. Goodbye, big tax bill?

Don’t be surprised if your old state doesn’t want to let you off the hook. It may rule you’re still domiciled there and order you to pay up.

It’s a trend. Given the tax revenue at stake, establishing a change in domicile can be a highly contentious issue, especially for individuals with large amounts of out-of-state income in play. New York, in particular, has carved out a reputation for aggressively working to prove that taxpayers are domiciled in the state, even when such claims defy common sense.

New York isn’t alone; several states have cracked down on taxpayers who claim they’re no longer domiciled there after moving away. For example, a couple who moved to London when one spouse became an attaché at the U.S. Embassy still had to pay Georgia income taxes, a court ruled last December.

States with a personal income tax generally tax their residents on their worldwide income. In contrast, nonresidents are taxed only on in-state income, such as wages earned in the state or gains on the sale of in-state real property. Revenue-hungry states have a big incentive to classify taxpayers as residents whenever possible.

This is where the concept of domicile comes in. Individuals domiciled in a state are automatically considered state residents and must pay state income tax on worldwide income.

People often confuse domicile and residency. You can have several residences, but only one domicile. Your domicile is the place to which you intend to return, even if you’re currently residing elsewhere. But there are many gray areas. Many people have homes in two or more states and may split their time fairly evenly among them. Someone’s ‘office’ may be their smartphone.

The precise definition of domicile varies from state to state. Some states define domicile by statute, while others base the definition on court cases and precedent. Once your domicile is established, it is generally presumed to continue until it is abandoned and your new domicile is established.

Simply moving from one state to another or asserting your former second home is now your primary residence may not be enough to prove a change in domicile. It’s important to understand what factors determine domicile.

Three main considerations are needed to prove a change in domicile:

  • Presence in the state in which you intend to establish your new domicile.
  • Intention to remain in the new state permanently or indefinitely.
  • Intention to abandon your old domicile.

Tax authorities look at many factors to assess a change in domicile. No one factor is conclusive, and factors often vary from state to state. In the Georgia case, for instance, the court noted that the couple didn’t pay UK income taxes, which among other factors, suggested their intention to eventually return to Georgia.

Given this ambiguity, it is wise to offer as much evidence as possible when making or defending a domicile claim.

Evidence may include the state in which you’re registered to vote, participation in a political group in the state, state income tax return filings, the location of real property and residences, mailing or forwarding addresses and location of valuables and belongings.

Other factors may include your driver’s license and automobile registration, state of professional license issuance, place of business, family location and where your kids go to school. Authorities can scrutinize how long you’ve been in the state and your physical presence in the state during the year, usage of your home within the state compared to usage of other homes, your memberships in religious organizations and social clubs within the state, the location of your bank and investment accounts, and the location of your doctor, lawyer and accountant.

They may even ask where your cemetery plot is located.

Domicile affects more than taxes. States with community property laws can complicate matters if one spouse is domiciled there but the other is not. The laws of your state of domicile can also have a big impact on divorce cases and the effectiveness of asset-protection strategies.

If there’s any ambiguity in your situation, consult your financial adviser and lawyer before you try to change your domicile.

Even expert advice doesn’t guarantee avoiding a dispute with tax authorities. But you’ll have better odds. Knowledge and forethought are your best allies when determining or changing your domicile.

Laurie Samay is a client service and portfolio manager with Palisades Hudson Financial Group, a fee-only financial planning firm and investment manager in Scarsdale. She can be reached at laurie@palisadeshudson.com.

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