More than ever, we are a mobile society. Many people live, work, invest, and spend time in multiple states and even countries. While this flexibility offers many benefits, it can also create complex state income tax issues, specifically the rights of multiple states to tax income.
While every state has its own unique approach to taxation, changing income tax domicile may be advantageous for some individuals. In this article, we’ll explore the difference between domicile and residence, what makes you a resident of a state, and how to change state residency for taxes.
State of Domicile versus Residency
When determining state residency for tax purposes, there are two key terms: “domicile” and “residency.” Although these terms are often used interchangeably, they are not the same from a legal and tax perspective. This can make the relationship between domicile and residency confusing, especially when the definitions of these terms vary by state. In general, domicile is a person’s permanent residence and place they intend to return to. A person can only have one domicile at any given time. Residency, on the other hand, may be the same as a person’s domicile, but it can also be a person’s temporary place of living, even for an extended period of time. A person may have more than one residency at once, and these do not necessarily reflect their permanent home, or domicile.
Establishing domicile in a state means that state’s laws apply. In other words, the state of a person’s domicile has the right to tax income, and the individual has the right to rely on that state’s laws related to asset protection, marriage, divorce, probate, retirement security, bankruptcy, etc.
Changing Domicile
Changing domicile requires two important steps: (1) establishing a new domicile; and (2) severing the connection to the old one. When changing domicile, it is impossible to leave an old domicile until a new one is established—often referred to as the “leave-and-land” rule. This requires having a residence that can reasonably be viewed as one’s fixed and permanent home. The key is establishing enough evidence to demonstrate the intent to make that home permanent, which can be accomplished by spending as much time as possible in the desired state of domicile and taking the steps to integrate oneself into the new community as much as possible (see below for the best ways to do this). There are no set rules for this; it is a “facts and circumstances” test, and the more facts and circumstances that support the new domicile, the better.
Factors Indicating Intent to Change Domicile
Time Spent in the State
Time spent in a state is one of the most important factors in demonstrating intent to change domicile. Tracking time in the new state helps support that a genuine change of domicile has occurred. If domicile is ever challenged, personal and business calendars can serve as useful evidence. Additional records, such as credit card receipts, purchase records, commuter passes, flight records, telephone records, and cell phone statements, can further support the claim by showing regular activity in the new state. Even social media activity may be considered, and some individuals use geo-location enabled apps on their phone to track physical presence within the new state of domicile.
Real Property – Either Owned or Rented
Real property, either owned or rented, can also help demonstrate intent to establish domicile. Typically, when more than one residence is maintained, more weight is given to the residence that is owned, though other factors may also be considered, such as the way homes are furnished. Keep in mind, domicile is a person’s intended permanent home, so a residence that is more fully furnished and suitable for year-round use is more likely to be considered the primary, or permanent, residence.
Cherished Items – Location and Placement
Generally, people keep their most valued items nearby, so the location of valued belongings can be another important factor in determining domicile. In other words, where are the items that are near and dear? Where is valuable artwork or jewelry kept? Where is the family pet? Where is the safety deposit box? If a person has more than one car, where is the primary or more valuable car located? Moving as many of these items as possible to the new domicile can help support a change of domicile.
Other Factors in Establishing Intent
Domicile is demonstrated through actions over time. Although not exhaustive, the following are helpful actions that demonstrate intent to change domicile:
- Relocate the family pet to the new state
- File taxes as a “resident” in the new state, and file as a “non-resident” in the old state
- Register to vote and actually vote in the new state
- Obtain a driver’s license in the new state
- Update car insurance to reflect the new state
- Change the address on your bank and investment accounts to the new state
- Register automobiles, boats, motorcycles, campers, or other vehicles in the new state
- Sign up for local delivery of things like newspapers, magazines, and other periodicals in the new state
- Update your estate plan in the new state
- Use doctors, lawyers, dentists, accountants, hairdressers, social workers, and other professionals in the new state
- Switch gym memberships, clubs, civic organizations, and places of worship to the new state
- File a “Declaration of Domicile” or similar document in the new state (if the state has such a procedure)
- Forward mail from other locations to the new state
- Gather for family holidays and other seasonal events in the new state
- Engage in some level of employment in the new state
- If you own property in the new state, make a homestead election there, and surrender any homestead benefit in the old state if you still own a residence there
While states generally agree on the definition of domicile, they do not all agree on which factors determine it or how much weight certain factors should be given. Therefore, when establishing a new domicile—and more importantly, severing an old one—it is important to understand and follow both states’ specific rules and procedures.
Severing Domicile in the Old State
It is just as important to try to sever ties to the old state as it is to establish ties to the new one. In fact, when domicile challenges arise, they almost always involve the old state refusing to give up its status as domicile.
Whenever possible, selling any real estate owned in the old state creates the cleanest severance from an old domicile. This break, coupled with the purchase of a residence in the new state, is probably the single best indicator of a person’s intent to change domicile. This is one of the reasons people who do not want to maintain two homes and sell their old home have little trouble establishing a change of domicile.
In some cases, a person may wish to keep a residence in a former state of domicile. In such instances, spending as little time as possible in the old state, at least for the first few years, can help support a clearer transition. Frequent or extended visits to the old state can complicate matters and raise questions of whether a true change in domicile has occurred. It is also important to ensure that any homestead election has been updated, as this is often overlooked and can carry significant weight.
More broadly, the considerations outlined above are general in nature and do not address the specific nuances that can vary by state. Changing domicile ultimately depends on the facts and circumstances, and careful consideration and advice from competent financial, legal, and tax professionals is often necessary to understand the implications of such a move.
Frequently Asked Questions (FAQs)
What does domicile mean?
Domicile is where you permanently reside and spend most of your time. You can only have one domicile.
What is domicile address?
The address of your primary or permanent home.
What is the difference between domicile and residence?
Your residence and your domicile may be the same or they may be different. Your domicile is your permanent home, while residence is any place you physically live, even on a temporary basis. You can have multiple residences but only one domicile.
What is the tax impact of changing domicile?
Because tax laws vary from state to state, changing your domicile to a state with more favorable income taxes may reduce state income taxes, property taxes, and/or estate taxes.
How do I change state residency for taxes?
To change your tax residency, you must establish a new domicile and sever ties with the old one. This is primarily demonstrated through actions that show intent to make the new state your permanent home, such as spending significant time there, updating your address on accounts and records, and moving personal belongings and community ties to the new state.
Can I be a tax resident of multiple states?
Even if you are domiciled in one state, spending 183 days or more in another state may subject you to income taxes in both states. However, what constitutes a “day” varies by state and not every state uses the 183-day rule. If you do not spend 183 days in any state, consult your tax professional.
To explore whether changing domicile could benefit your situation, please contact us.