You’ve said your goodbyes, packed up all your boxes, and the moving truck is waiting outside. Soon you’ll be heading to a new home in a new state. Chances are, you probably haven’t given much thought to what this means for taxes. But you can bet that your new state will be glad to see you and your former state will be sad to see you go (and perhaps even a little skeptical). It all comes down to revenue.
Your state of domicile, or residency, determines where you pay state personal income tax. Typically, domicile is defined as where an individual maintains his or her permanent abode and where that person intends to return from any absence. An individual can only have one domicile at any one time.
In the last 10 years, states have had to fight harder for revenue. They began picking up on a trend of taxpayers changing the location of their residence while still maintaining significant ties to their former home state. States wisely concluded that often the change in location was more of an effort to reduce state tax liability than to make a permanent move. This resulted in an increase in residency audits.
Residency audits focus on the facts and circumstances of your move from one location to another to determine whether you have met the burden of establishing your intent to make the new location your permanent home.
A large percentage of audits involve situations where a taxpayer maintains more than one permanent abode. For example, someone who splits time between their home in Indiana, which they have maintained most of their life and their Florida property. Two factors are usually looked at in this scenario: (1) Which state does the taxpayer intend to be their residence, or domicile? and (2) Where does the taxpayer have the greatest connections?
If you are contacted by a state or locality for the purpose of conducting a residency audit, you should be prepared to provide evidence that your new home is indeed your domicile. The following tend to show the state with the greatest connections for a taxpayer:
These 26 triggers are not intended to be exclusive or comprehensive. States will look at these factors and other facts and circumstances to challenge state of domicile.
Some states also subject statutory residents to their taxes. Statutory residence is determined simply based on the amount of time in the state. A typical rule considers an individual a statutory resident unless the person spends more than a certain number of days outside the state, typically 181 to 183. Taxpayers should keep good records of time spent in each state, which includes travel receipts and receipts of monies spent in the states.
Consult with your tax advisor for ways to help support your state of domicile for income tax purposes and be sure to involve your tax professional should you receive any state or audit notices.