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?
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 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:
If you have only one home, then establishing a 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.
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:
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.
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.
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
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.
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:
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.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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