Moved to a New State? Be Prepared for a Residency Audit

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:

1. The state where the taxpayer is registered to vote
2. The state where the taxpayer maintains a driver’s license and vehicle registration
3. The state where the taxpayer obtains a homestead exemption
4. The state where the taxpayer has active bank accounts and banking relationships
5. The state where the taxpayer spends the greatest amount of time
6. The state where the taxpayer maintains television and internet connections
7. The state where the taxpayer supports a spouse and children
8. The state where the taxpayer gathers for family and social events
9. The state where the has doctors, lawyers and accountants
10. The state where taxpayer is listed in the telephone directory
11. The state where the taxpayer houses pets
12. The state where the taxpayer owns a cemetery plot
13. The state where the taxpayer worships regularly
14. The state where the taxpayer maintains safe deposit boxes
15. The state where taxpayer participates in social, fraternal or athletic organizations
16. The state where the taxpayer was domiciled at birth
17. The state where the taxpayer keeps works of art, furniture, family pictures or heirlooms
18. The state where taxpayer records address for insurance, deeds, mortgages, leases, passport, federal and local tax returns. Make sure that intended domicile is on the last filed Form 1040 or a change of address was filed
19. The state where the taxpayer is employed
20. The state where the taxpayer receives unemployment compensation
21. The state where the taxpayer owns property fit for year-round living
22. The state where the taxpayer maintains professional licenses
23. The state where the taxpayer receives mail
24. The state where the taxpayer maintains union membership
25. The state where the taxpayer conducts business
26. The state where the taxpayer declares residency for hunting or fishing licenses or school tuition

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.

Shaun Mawhorter, CPA, CGMA
Senior Tax Manager
smawhorter@klcpas.com | 574.264.2247 x303