More than ever, we are a mobile society. Many people live, work, invest, and spend time in multiple states and even countries. As freeing as that flexibility is, during tax time, this new reality raises the specter of complex state income tax consequences, specifically the rights of multiple states to tax income.
While every state has its own unique approach to taxation, changing income tax domicile could be advantageous and something worth exploring.
Domicile versus Residency
The terms “domicile” and “residency” are often used interchangeably, but from a legal and tax perspective, they are not the same. States vary in their definitions of these terms, but they agree on the following distinctions: domicile is a person’s permanent residence. A person can only have one domicile at any given time. Residency can be the same as a person’s domicile, but it can also be a person’s temporary residence, which could be for an extended period of time. However, it is not the place a person ultimately attaches themselves to and intends to return to. A person may have more than one residency at a given time.
Basically, establishing domicile in a state means that the state’s laws apply to someone who lives there. In other words, the state 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. Domicile requires bodily presence in the state and specific intention to return when away.
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 person has established and arrived in a new domicile – often referred to as the “leave-and-land” rule. This requires having a residence that can reasonably be viewed as one’s fixed 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 new state of domicile, changing addresses on all accounts, bills and services to the new address, and taking the steps to integrate oneself into the new community as much as possible (e.g., joining houses of worship, organizations, social and civic clubs). There are no strict 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, if not the most, important factors in showing intent to change domicile. Keeping track of time spent in the state of intended domicile demonstrates one has made a true change of domicile. If domicile is ever challenged, personal and business calendars can be helpful and may even be introduced as evidence. Additional records, such as credit card receipts and statements showing purchase dates of items within the new domicile state (e.g., commuter passes, flight records, telephone records, and cell phone statements), can help bolster the claim that a person has changed domicile to a new state. Interestingly, social media accounts can have an impact, too. Finally, there are software programs that use geolocation on a phone that can also track you physically.
Real Property – Either Owned or Rented
Real property, either owned or rented, can be evidence of intent to domicile as well. Generally, if a person owns one residence and rents another, more weight will be given to the one owned. However, additional factors may also be considered, such as the way the homes are furnished. Keep in mind, domicile is the place a person intends to be a permanent home. Naturally, the nicer a home is furnished and the more suitable it is for year-round use, the more likely it will be considered a primary residence.
Cherished Items – Location and Placement
Most people want to be close to the things they value most. Therefore, another key element in determining whether someone has truly changed domicile is what one has done with the items valued most. In other words, where are the items that are near and dear? Where is valuable artwork or jewelry? Where is the family pet? Where is the safety deposit box? If a person has more than one car, where is the nicer car? Consider moving as many of these items as possible to the new domicile.
Other Factors in Establishing Intent
Intent to domicile is demonstrated through an inspection of actions over time. Although not meant to be exhaustive, below are some steps/actions that demonstrate intent to change domicile:
- Locate a family pet in 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 vote in the new state
- Get a driver’s license in the new state
- Change car insurance to cover the car in the new state
- Change the address on your bank and investment accounts to the new state
- Register an automobile, boat, motorcycle, camper or other motorized vehicle in the new state
- Sign up for local delivery of things like newspapers, magazines, and other periodicals in the new state
- Update an 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 intended domicile
- 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 your homestead exemption in the old state if you still own a residence there
Keep in mind that while states generally agree on the definition of domicile, they do not all agree on which factors should be used in determining domicile, or what weight certain factors should be given. Therefore, when attempting to establish a new domicile – and more importantly, sever an old one – it is important to review and understand both states’ specific procedures and rules.
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, rather than the issue of the new state rejecting a claim of new domicile established.
Whenever possible, one should consider selling any real estate owned in the old domicile since this creates the cleanest severance with a former state. This break, coupled with the purchase of a new residence in the new state, is probably the single best indicator of a person’s intent to change domicile, and is why most people who cannot afford to own two homes have little trouble establishing a change of domicile when they sell their home in the old state and move to a new home in a new state.
However, a person may wish to keep a residence in an old state of domicile. In such instances, it is helpful to spend as little time as possible in the old state, at least for the first few years. Returning to the old state and spending a substantial amount of time with family and friends – even as a guest – can complicate matters and raise the question of whether one has, in fact, left the state. Also, note the item on the list above about changing the location of the homestead exemption. This is a particularly important one and is a trap for many.
The suggestions above on how to change tax domicile are not meant to delve into the nuanced differences between specific states. That requires a review of the particular facts and circumstances surrounding the intent to change domicile. The advice and counsel of competent financial, legal, and tax professionals should be sought to review, analyze, and advise on the potential consequences of such a move.
To explore whether changing domicile could benefit your situation, please contact us.