How Do I Establish Residency in a New State

Establishing state residency can be a thorny issue.  As people move and work in different states, the concept of residency becomes an important one.  It determines which jurisdiction has the right to tax you and the legal protections, regulations, and rights that apply to you. 

State residency is a particularly timely issue because many people living in high-tax states have moved temporarily out of the high tax-state and find themselves in a lower-tax state. 

So, the question comes up: if I am in another state, do I have to pay taxes in my home state? 

Generally, the answer is yes.  A temporary move does not change your residence.  States are also, definitely, paying attention to this.  Residency audits were on the rise before COVID-19; we don’t expect them to go away any time soon. 

So, how do you change your state of residence? 

Start by defining terms: domicile versus residence

These two terms often appear interchangeably, but they are not the same thing. 

If a person has a “domicile” in a state, they are subject to that state’s laws and that the state has the right to tax that person’s worldwide income.  Depending on the state, certain rights accrue to domiciled residents.  These rights can include things like instate tuition at colleges to certain real estate benefits.

Your residence is where you live. 

It is possible to live in a residence for some time, even an extended period, and not establish a domicile in a state.  If your residence is not the place you attach yourself to and intend to return to, it isn’t a domicile. 

While you will have one domicile state, it is possible to have multiple statutory resident states, which can be a real headache. 

States have different definitions for domiciles but generally agree on two basic tests:

  • Test one: A domicile is where you have your fixed, permanent home.
  • Test two: it is a home you intend to return to when you are away.

If you have only one home, then establishing domicile is easy: it is where you live.  If you have multiple homes or reside in various states, then the conversation becomes trickier. 

Establishing a fixed residence anywhere is not challenging, and you can pretty easily declare it your permanent residence. 

When there is any doubt about residency, therefore, the determining factor is intent. 

Establishing intent is critical to establishing residency (domicile)

As states become increasingly concerned about people moving around the country and changing their residency to gain benefits or avoid taxes intent is becoming more critical.  And, while you can decide where your residence is, someone else, such as the tax office or a judge, assesses your intent.

This means that you have to prove your intent to that person.  It also means that the determination of intent includes an element of subjectivity.   

You do this by severing ties with the old state while creating ties with the new one.  Severing ties is just as crucial as establishing ties since state laws generally require that you abandon your old domicile to establish a new one.

Each state has different rules, but generally, they will look at:

  • Location of your employment and whether that is permanent or temporary.
  • Location of bank and investment accounts and even where you incur charges on your credit card.
  • Participation in professional, trade, or other groups.
  • Where you live, whether you own or rent, and the amount of time spent in one state versus another.
  • Vehicle registrations.
  • The state that issues your driver’s license or any other permits.
  • State where you are registered to vote and where you actually vote.
  • Membership in social organizations.
  • Where you or your children go to school.
  • Where your doctor is located. 

There is no definitive rule that says you may not have a club membership in another state.  Nor will consulting a doctor outside your new state mean that you have changed your domicile.  But you have to make enough changes to satisfy a judge or a reviewer that you intend to stay in the new state.

And then there is statutory residency

You will have one state domicile, but you can have multiple statutory residences.

If you spend enough time in a second state, then the second state can claim you as a statutory resident.  In this case, you will not be domiciled in the state, but you are still considered a state resident. 

States can tax statutory residents. 

Statutory residency rules can become very tricky since different states have different laws.  If you work in multiple states throughout the year, you could potentially become a statutory resident in various states. 

It also means that you want to be careful in claiming a change of domicile when you are not genuine in your intent to do so. 

You may not have enough evidence to prove a change of domicile, but instead, establish statutory residency and end up making your tax situation more challenging and more costly.

Strategies to change your residence

If you are moving from one state to another, you will easily establish residency in the new state, and you don’t have to think much about it.  You change your addresses and registrations to your new location, pay your taxes, and you are ready to go. 

If your situation is unclear or you are a resident in multiple states and want to determine your domicile purposefully, the process requires more planning.  Consider talking to an expert to make sure you consider all of the nuances of your particular situation. 

Careful documentation is vital

Remember, you want to be able to convince a judge or reviewer of your genuine intention to make the new state your domicile.  This means you should:

  • Note the date of your change of residence and keep a diary of travel so that you can document that you have been in the state.  Keep travel receipts as evidence.
  • Document the reason for changing your domicile that explains your intent.   
  • Get a driver’s license in your new state.
  • Register any vehicles you have in your new state.
  • Pay taxes, and submit a return in your new state.
  • Register to vote, and vote, in your new state.
  • Open bank, brokerage, and investment accounts in your new state (or at least establish your new address for your accounts, you should not need to close and reopen an account you have with a multi-state institution).
  • Get involved with local businesses, charities, and organizations (and resign from organizations in your previous state).
  • Change the mailing address for all services such as insurance, doctors, and bills to your new address.
  • Keep a calendar of when you are in your former state versus when in your new state or states
  • Where applicable, change professional licenses to your new state.
  • Establish relationships with new doctors, dentists, accountants, attorneys, and other service providers. 

If your change is legitimate, then you will not have a problem

If you are legitimately changing your domicile state, then doing so will likely not be an issue.  Most problems come when people try to claim a different domicile to avoid taxes or gain access to legal privileges. 

Still, if you have a significant income, a little planning can potentially save a lot of hassle later on.  Once you stop filing taxes in one state, you could be a target for an audit.  So, it is worth ensuring that you have some documentation ready. 

Also, if you do find yourself with multiple statutory residences, a tax preparer can do a lot to help you avoid overpaying taxes.  Without a thorough understanding of the rules, you can end up paying significantly more than you have to. 

Would you like some help? 

If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.

If you aren’t a client, why not? We can take care of your accounting, bookkeeping, tax, and CFO needs so that you don’t have to worry about any of them. Interested?  Contact us here to set up a no-obligation consultation.

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