Many taxpayers, especially those in highly taxed states, have considered moving out of state and seeking lower or zero income tax rates. When done properly, this can present substantial tax savings. The process for establishing residency in a new state can be straightforward for most taxpayers. However, when a taxpayer simultaneously establishes residency in a new state while maintaining ties to their historical state, they may unintentionally trigger a residency audit.
There are five main factors that are considered when state tax authorities determine where a taxpayer’s residency is maintained. The central theme to these five factors can be remembered as “home is where the heart is.” The state agencies are looking to see where your home is, using these five factors to support their claim.
Primary Factors
1. Domicile
State agencies will assume by default that a taxpayer’s largest and most valuable house is their domicile. While we understand this is not always the case, a taxpayer needs to ask themselves if their new residence is larger or more valuable than their previous property as this can help build their case against the previous state.
The next question a state will ask is about the nature of the property’s use. A property used mostly on weekends, or for brief periods of time may be viewed as a vacation property in the eyes of the state. Whereas a property in which the taxpayer returns at the end of every workday stands a stronger chance to be viewed as their domicile.
If a taxpayer maintains their historical property, the taxpayer must show the nature of its use has shifted. For example, the taxpayer used the historical property as a domicile in the past, but now uses it strictly on weekends. Taxpayers will need to place more emphasis on the other factors if they decide to maintain their historical property.
Lastly, the state will look at what real estate tax programs are being taken advantage of on each property. A taxpayer cannot claim a homestead exemption on a property that they claim is not their domicile for income tax purposes.
2. Business Ties
State auditors will assume the taxpayer will have their strongest business ties to their state of residence. When considering business ties to the state, an auditor will look at where the company’s headquarters are located, what specific office the taxpayer works out of, where other members of the team are situated, and more.
3. Time Spent
States will make the assumption that a taxpayer spends most of their time in the place they claim to make their permanent residence. There is no specific day count with this factor like there is for statutory residence tests. However, a taxpayer will want to show a larger spread of days spent within their state of domicile over other states. In addition to the quantity of time spent, the states will review the quality of time spent in the state. Under quality of time spent, a taxpayer will need to show they are spending their time with family, friends, with local groups and communities they are apart of, etc.
4. Near and Dear
This factor looks at the emotional value a taxpayer places on the property. As previously mentioned, an auditor is going to assume the taxpayer will have the strongest emotional connection to the property that is their domicile. The near and dear factor will look at whether the property maintained in the state feels and acts like a home, versus a temporary place to stay. Details such as whether any family pictures are hung up or kept in the home, if the taxpayer has any pets living there, and if the taxpayer can provide moving bills or insurance policies help strengthen support for the taxpayer.
5. Family Ties
A state auditor will consider where the taxpayer’s family members are located as evidence of their residency claims. The default thought is that a taxpayer will consider their home to be closest to where their family is. However, that may not always be the case. There are certain instances where spouses can have different residencies for income tax purposes if they spend substantial amounts of time apart.
Children can also play a pivotal detail for residency audits. If a taxpayer and their children split time between two properties, a residency claim can be supported by looking to where the children attend school or daycare.
Secondary Factors
Many taxpayers already understand to update their driver’s license, change their voter registration, and a number of other factors when they move states. There is a common misconception that these factors carry the same weight as the primary factors listed above. However, while still important considerations, the reality is that states will only view them as supplemental evidence.
- Obtain a new driver’s license
- Update vehicle registration to obtain new license plates
- File a Declaration of Domicile with the local county if applicable
- Register to vote in the new state
- If the taxpayer continues to maintain a property within their former state, they must ensure that they forward all mail down to their new residence
- Contact all companies they conduct business with to update their address with their new residence
- Seek out medical, dental, and other personal services in the new state
- If they own their property, apply for a homestead exemption. Likewise, revoke their homestead exemption in their former state.
When a state feels they have a strong case against a taxpayer, the burden of proof falls onto the taxpayer to prove their new residency. It’s important for the taxpayer to document their case strongly and keep the above factors in mind to build a good defense.
Article by Jarrod Galassi, Senior Tax Manager
