Domicile and statutory residency are not the same.
The IRS defines ‘domicile’ using two statements:
1. The person intends to use that home (or at least reside in that state) indefinitely. 2. Whenever the person leaves that home, he or she intends to return.
As you can see, that definition leaves a lot of room for disputes. You could “intend” to use a vacation home indefinitely, and whenever you leave it, you do plan to return one day. It might be eight months from now, but you still plan to return.
Statutory residency is a more precise concept, and therefore more complicated. Plus, different states use different rules to determine if you meet their definition of residency.
Each state has different rules. Some of those rules are clearly spelled out, and some are not. Audits happen, and the person being audited frequently loses, due to inadequate record keeping or decisions they didn’t realize would impact their status.
The seven states with no income tax don’t worry about statutory residency. But for the other 43 states, there are 11 different ways among them that residency is determined. Let’s take a look at two of the biggest states, as examples.
Each state has different rules. Some of those rules are clearly spelled out, and some are not. Audits happen, and the person being audited frequently loses, due to inadequate record keeping or decisions they didn’t realize would impact their status.
California Statutory Residency Rules
California loves taxes. They will tax your income no matter where you make it if you are a deemed to be a resident of the state. If you open a tuk-tuk business in the mountains of Nepal, but you live in California, you will pay state taxes on your business income.
Out-of-state pensions, temporary work, IRAs, real estate in other states – if you make the money, they will tax it. They also tax out-of-state residents who make income in California.
As this article amusingly points out, even Lebron James got taxed by California every time he played there while still a member of the Cavs and his residence was in Ohio.
How does California determine residency?
The answer is grey - not black and white, as California looks at a number of factors to determine if they beleive a taxpayer is or is not a Resident of the state. For example:
Amount of time spent in and out of the state – but no number of days is specified
Location of your spouse and children
Location of your principal residence
State driver’s license and vehicle registration
Professional certifications in the state and voter registration
Bank accunt locations
Where your doctors, dentists, accountants, and attorneys are located
Social activity locations such as your place of worship, professional associations, memberships
Permanence of your work assignments in California
Have you left a trace of evidence that your departure from the state was other than temporary - i.e. do you have a storage unit in the State?
If you have a vacation home in California, and it really is just a vacation home, you still have to be careful to prevent an audit. For instance, don’t have official government documents mailed to the vacation home.
New York Statutory Residency Rules
The first residency test used by New York seeks to determine if you spent more than 183 days – half the year – in the state. And in true modern legalese, “in” is defined to mean setting even one foot in the state, for any part of the day. If you were in the state at all, for any length of time, on a day, that counts as a “day”.
If you have a residence in New York, they will require you to prove you were NOT here more than 183 days. That means, you need to keep receipts, travel itineraries, and any other items that prove you were not in the state on days when you weren’t there.
Why? Because New York has stepped up their residency audits on high net worth households, conducting over 3000 in a five year period, and averaging over $140,000 in taxes collected per audit! In total, they generated over $1 billion.
Second, New York uses a 5-point domicile test. They look for:
Home – which state has the larger home, larger home value and appears to be used the most?
Active business – do you have a New York business, even one you’re running from another state?
Time – what percentage of time do you spend in each state?
Items near and dear – did you move your artwork, wine collection, jewelry, and other valuables to your new state or are they still in New York?
Family – where do your children attend school?
In addition, New York looks at items such aschurch attendance, voter registration, club memberships, and anything else that gives the impression of where you actually live.
If they determine you live in New York, they’ll tax all your income. If they determine New York is not your primary residence but that you still do business there, you will pay non-resident income tax. This would include real estate rental income and business income if that business is located in New York.
Conclusion
There is no silver bullet to determining your state residency if you have complicating factors such as business, real estate, or important local connections. No matter where you move, if you continue earning income in a state that taxes income, be prepared to pay it. This is one reason many people choose to move to a no-income-tax state. Even if you still have to pay taxes in one state, at least you will be assured of not being taxed twice.
Each state has different rules. Some of those rules are clearly spelled out, and some are not. Audits happen, and the person being audited frequently loses, due to inadequate record keeping or decisions they didn’t realize would impact their status.
If you plan to spend time in 2 or more states, consult a tax professional to map out how you can do pursue your objectives and avoid expensive, negative year-end surprises.
Reach out if you are in this situation - we understand the rules, and can help.
Cobalt PacWest | CPAs & Advisors
4225 Executive Square # 600
La Jolla, CA 92037
858-247-0939
npapagni@cobaltpacwestadvisors.com