A Comprehensive Guide To Determine Residency In States For Tax Purposes

A Comprehensive Guide To Determine Residency In States For Tax Purposes

Residency is a concern that generates a number of issues. Not only in creating home state returns, but as well as in that of other states.

In daily discussions, domicile is a term that is often synonymously used with residence. But considering taxes, such is not the case. These two terms have particularly varying definitions.

Considering a strict legal understanding, residence merely refers to a place of dwelling—a location. So that said, a person may acquire several residences or homes in which he or she lives.

Around 28 states use the term “domicile” to conclude whether or not an individual is a taxpayer of the state.

If a person moves to another state, but only for a short period, the domicile will not change.

Short period can be characterized from about a month or two months to up to a year or even more.

So to make changes in domicile, there should be actions that show a more permanent change in location. And, you should express an intent to do so.  Sometimes, the intent does exist. However, some taxpayers do not really show the necessary actions.

Here are some actions that can be a basis for change in domicile:

·       Changing driver’s licenses to that of the new state.

·       Signing leases or purchasing new homes

·       Registering children in local schools

·       Registering to become voters of the state

There are states that will consider you a taxpayer even if you don’t consider the state as your domicile.

This happens when the states makes you a resident after you have resided for a certain period.

This implies that you could be taxed in two locations: in your place of residence, and in your domicile.

Consider Minnesota as an example. Generally, residence in this state is defined by two guidelines. First, domicile, which is permanence in residency. And the other is the 183-day rule.

Some states declare these two parameters for identifying taxpayers:

·       The individual is required to maintain a permanent place of dwelling in the state; and,

·       The individual should spend the number of required days in the state

In such case, permanent here does not necessarily mean owning a property or a long term lease. It simply refers to permanent, immovable, quarters. Unlike that of something mobile such as boats with living amenities or an RV.

For number of required days, here are the values for the states that utilize this parameter:

·       183 Days – RI, DE, DC, KY, ME, PA, MD, MN, MO, CT, NJ, NC, IA, UT, MA, VA, WV

·       184 Days – NY (New York also requires that an individual should acquire a permanent place of dwelling for 11 months)

·       185 Days – NM

·       200 Days – HI and OR

·       210 Days – ND

So if you consider or are moving across state lines, residency is something you should not overlook.

Especially as far as paying taxes go. States are very much conscious of this. They know that citizens often attempt to claim residency as per tax regulations.

Thus, our clients sometimes raise this question:

Should I consider moving to another state to benefit from lower or leaner tax regulations?

The ideal response to this is not always easy. There are a lot of considerations to make, especially with regards to family concerns.

The first thing to identify is if tax benefits would outweigh any family or personal concerns. However, even if we factor out personal considerations, the answer is still difficult.

So, how do states determine residency?

As noted, states are conscious of the fact that there are citizens who claim residence because of tax benefits.

And in such cases, the state will do its best to challenge the authenticity of your residence claims. And they will do so in court.

A number of states utilize a list of factors established to make determinations. So, if you want to pose residency claims, make sure you are aware of that these factors are.

It is wise to do so before you make the possibly reckless decision of relocating your family.

You should also be mindful of the fact that no one factor is decisive. The court can render its own decision, and independently, the tax authorities can also render its own.

And they base this on several factors, depending on what your circumstance are. Some factors may weigh more heavily than others, depending on the decision reach by the courts or tax authorities.

Here is a list of some of the factors that have been established in the past years:

·       The period spent within the state is possibly the single largest consideration.

·       Telephone listing locations

·       Preferred banking locations, as well as investment accounts

·       Whereabouts of preferred professional services (doctors, dentists, lawyers, accountants, brokers, etc).

·       The place and worth of your primary place of residence as compared to the worth of other residences.

·       The place of your residence that house important legal papers. Such as will, tax returns, etc.

·       Where you remit your property taxes

·       Where your personal properties are found and registered (cars, boats, etc.)

·       Where your professional licenses are registered to

·       Where you do attend church, or do volunteer work, charity work, or political affairs

For taxpayers who spend a lot of time across states, it can all boil down to where permanent residence is located.

So, are you planning to use residency to evade higher tax rates, but still spend a lot of time in your old state?

If yes, you should definitely give considerations to the factors noted above. And, if necessary, consider a personal journal that tracks your time in between states.

Is it possible to be a resident of two states?

Yes. It is possible to be a resident of two states. However, it’s rare and it’s best to be evaded.

If you have lived most of your life in one state, taxes are a relatively easy part of your life as a citizen.

However, if you jump from one state to another… For instance, you work in one state and live in another, or you move midyear to another state. Then things can get really problematic.

Residency is key. It is the determining factor to where you’re required to file, to what types of returns you need to file. And most especially, residence is key to how much tax you need to pay.

But the problem is that identifying residency is much more complex than most people think. States have complicated and varying standards for what establishes residents.

By and large, a full residency can only be committed to one state. Most taxpayers who spend time in between states would end up filing two types of returns.

One for a resident return under a certain state and then another for a non-resident return.

Is this really possible?

Definitely, it is possible for an individual to earn residences in two varying states. This usually happens when we consider the number of days factor.

Say, your domicile is in a certain state, but you have lived in a different state for 184 days due to work. In this case, it will most likely turn out that your residence is in two varying states.

But at all costs, avoid filing residency in two states. This is because states have the authority to impose taxes on all your assets and income.

Even if you claim you’ve earned them elsewhere. So if you claim residency in two states, you’ll be paying more taxes than if you are resident of just one. If it’s really unavoidable in your case, then consider filing for non-residency in other states.

Non-residency in other states

If you spent a short period in a certain state because of work or a brief vacation, then you aren’t a resident. In this case, you only need to file residence in your primary state. It is only when you earn money in a different state would you need to file a non-residency claim.

Part-year residence

In case you transfer to another state within a year, do file for a part-year residency in your previous and new state.

This means you will be considered as a resident of the state only within the days that you remained in the state. This will keep you from being taxed in two states for a given period.

Dual residencies lead to double taxes

Rules differ from state to state. But most states define a resident as someone who stays in the state but not temporarily.

As per domicile, states regard this as a person’s permanent home. That is, where people return to after being outside of the state for a given period.

As such, the basis of taxing an individual’s income is usually reliant on these two factors. Residence in the state and an individual’s corresponding domicile within the state.

Most of the time, states would tax a full 100 % on the resident’s income, whatever sources they come from. This could also include portfolio income.

Special considerations, however, are available from time to time.

For instance, considerations are given for those in active service in the military. Special exceptions are also available for those who are under medical treatment for a long time.

In the case of dual residency, this usually leads to the problematic case of dual taxation. Here are some individuals who are at risk:

·       Retirees with homes in other states

·       Individuals attending to business transactions or interests in other states

·       Individuals who moved outside of the state, but then returned after a certain number of years

·        Individuals who moved outside of the state or overseas temporarily due to contract work

·       Individuals who detached ties to the state but failed to claim a resident status or a domicile in another state

Steps to take for change in residency

If you decide to change your residence, note that this involves careful planning and a hands-on approach.

While your intent is something that the courts may consider, documents and facts are more important.

They ultimately assess these to assess your true residency. So remember, cautious documentation is imperative.

Consider these tips with regards to your new state:

·       Record the date in which you changed your residence

·       Put into writing the reason for which you changed your residence. This must show a viable basis and must express your intent. For instance, you may note retirement or permanent transfer.

·       Process a new driver’s license

·       Process a new registration of your vehicle

·       File your income taxes in the new state

·       If there are any homestead claims, revoke them and remit all similar documents to your new state

·       Register as a voter in the state

·       Open a bank account within the vicinity, as well as for brokerage accounts if you have any

·       Create new involvements with businesses or organizations, even charities within your new state

·       Update your billing or mailing addresses for all your transactions to that of your new address

·       Save all documents/verifications that will support your timeline. This includes airplane tickets that verify your date of relocation, hotel records, etc. Also include credit card statements if any.

·       Update all your professional licenses to reflect within the new state (if any).

·       Seek out professional services within the area—physicians, dentists, lawyers, accountants, etc.

In addition, closely observe all the formal procedures that are involved in changing residencies. And, always save and store any information or documentation that will prove your change in residency.

This is imperative if you’ve filed your tax returns in a current state but then plan to relocate to another.

Also make sure that you have fully abandoned your previous state. Generally, states uphold that unless you do so, you have not really created a new domicile in their state. As such, save all documents up until you are qualified for residency in your new state.

Permanently changing your domicile while you’re still actively involved in a company is

Changing domiciles while actively involved with a closely held company is especially difficult.

It can be addressed through appropriate planning. However, states will continue to tax profits even if they come from pass-through entities.

A portion of your compensation will remain as taxable as long as business is conducted by the owner.

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Martin - Head of Real Estate and Finance at RateTake
Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.
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ratetake

Martin is Head of Real Estate and Finance division at RateTake. He creates content that helps people understand and make the right decisions for their financial future.