Tax Issues When Changing Your State of Residence

Tax Issues When Changing Your State of Residence

When more than one residence is owned, a perplexing issue is determining the state or locality the owner is a resident of for tax purposes.

For many states, an individual can be a tax resident if they are either domiciled in that state ormaintain a permanent place of abode in the state and spend more than 183 days during a calendar year in that state. Most states are aggressive in auditing this confusing area so it is important to follow the rules and do it right.

Many states and localities define when a person is considered domiciled in their jurisdiction and/or is a resident. They say that person is a resident for personal income tax purposes, unless for that year, such person maintains no permanent place of abode in the jurisdiction during the taxable year; maintains a permanent place of abode outside the jurisdiction during the entire year and spends in the aggregate not more than 30 days of the taxable year in the jurisdiction. In addition, some states and localities have a rule regarding presence in a foreign country.

Domicile is viewed as a state of mind and some of the questions that need to be answered are:

• 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 kept?
• Where are your business interests located and how active is your participation?
• Where does your family live?

When an individual does change their domicile, a taxpayer should consider doing the following:

• Change car registrations
• Change driver’s license
• Change voter registration and vote there
• Change passport
• Establish religious affiliations in the new area
• Establish social affiliations such as country clubs, dining clubs and other groups
• Move personal items including the near and dear things you have. Near and dear items include family photo albums and mementoes and valuable art
• Insurance policies should show your primary address in new state
• File for homestead exemption, if applicable
• File an affidavit of Domicile in 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 accounts 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 non-resident tax returns in state you moved out of if you have business or employment income from that state
• Buy municipal bonds from new state and dispose of bonds from previous state

Failure to do most of the previous items will cause the jurisdiction to question whether a taxpayer has really changed their domicile. Each taxpayer’s situation is different with their own distinct facts and circumstances so adapt the list to suit your circumstances.

Even if the jurisdiction agrees that a taxpayer has changed their domicile, the day count or 183 statutory day test is put into place. The jurisdiction’s position in cases where taxpayers are being audited for residency is that 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 grocery 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 the taxpayer’s. 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 costly.

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 making recordkeeping even more important. This can lead to excessive tax assessments and onerous penalties. Also note that depending on circumstances, both spouses do not have to be domiciled in the same state.

Many taxpayers’ 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 and not started only when a response is necessary to a challenge by a taxing authority.

Barry Horowitz, CPA, MST, Partner in charge of our State and Local Tax group assisted in the preparation of this blog. If you have any questions or concerns about any residency issues, please contact Barry directly at 212.829.3211.