How to Minimize State Tax Surprises When Moving to a New State
Article

How to Minimize State Tax Surprises When Moving to a New State

by Kelly Gillette
February 22, 2021

If you are considering a residency change, understanding the laws of the state you are moving from and the one you are moving to is critical to ensuring state income tax liability in your former state doesn’t continue. This applies not only to income tax exposure, but also to estate and inheritance taxes in states that impose them.

States use various methods to locate potential non-filers for residency audits, and many are becoming more aggressive and sophisticated at recouping lost tax revenue from individuals that have failed to pay income, estate and inheritance taxes in locations where they are still defined as residents. Some examples are checking systems for real property records for bills sent out of the state and comparing those with income tax returns filed, 1099s/1098s being filed by the payer with the state rather than the taxpayer’s domicile state, and receiving a non-resident return when a resident return was filed for the preceding tax years.

Background

Only seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) don’t impose an individual income tax on residents. The tax you owe depends on your classification as a full-time resident, part-year resident or non-resident. States have different rules for determining your residency status for taxation purposes, which are more complex than can be fully addressed in this article. Domicile and statutory residency are two factors most states use in determining residency status.

Your domicile (or legal residence) is your fixed, permanent and principal home where you reside and intend to return to after times of absence. You can only have one at a time. Establishing domicile in a new state is more complicated than changing your address on your tax return and driver’s license. Some states can consider you a resident for tax purposes even though your domicile is elsewhere. If you can prove domicile in another state, say Texas, the next step is being able to prove you aren’t a statutory resident in another state.

Statutory residency is generally, but not always, established by spending more than 183 days in a state and having access to an abode (somewhere you have a key and keep your things – you don’t have to own it). This trumps domicile in almost every state and can result in owing taxes on 100% of your income in some states, even if you owe taxes to another state for the same income.

For example, in California, the number of days spent outside of the state may not be enough to exempt you from income, estate or inheritance taxes there. You are considered a resident if you are either present in California for “other than a transitory or temporary” purpose or domiciled in California, but outside California for a transitory or temporary purpose. Residency is primarily a question of fact determined by examining your particular circumstances. The burden of proof is ultimately on you.

Also, the term residency may have more than one definition within a state. For example, in Texas, there are residency rules for higher education while qualification for homesteading a residence has a different definition.

10 Things You Need to Know

  1. Most states consider these five primary domicile factors:
    1. Time - It’s not just the quantity, but also the quality. How are you spending your time in the various states? If traveling, although that may count as non-resident days, it may not help support where “home” actually is.
    2. Residence - Where is the bigger, better home? Where are you claiming a homestead exemption? Where are you renting vs. owning?
    3. Business - What do you do? Where are your active business connections? Where is your office? Where is your assistant?
    4. Near and dear - Where are items that are near and dear to you? It doesn’t matter if you can afford two sets of things. Did you move your “personal” things such as heirlooms, kid’s teddy bear, jewelry and pets to your new home? Are you now seeing a new dentist, doctor, stylist, etc.? Keeping things in storage in your former state isn’t a good fact if you intend to permanently move elsewhere.
    5. Family - It’s hard for a husband and wife to establish separate domiciles and minor children can also have a major impact on determining domicile. Where do the kids go to school?
  2. There are other actions that could positively affect the determination of domicile.
    Some examples are voter and vehicle registration, driver’s license, receiving mail, opening accounts, changing to local professionals for services, permanent mail forwarding and sending children to school in the new state, as well as severing ties with the old.
  3. January 1 move date – not likely.
    How many moving companies move you into your new home on New Year’s Day? Although it might seem simple, this is a red flag for a residency audit in many states.
  4. Why can be as important as where.
    You must leave the old state and actually land in the new state. Was there intention to come back to the original state? Where are you when the state tax audit is happening a few years after the move?
  5. A “day” may not be what you think.
    For many states, one minute in the state counts as a day. Spending the night (crossing midnight) equates to two days. Generally, there are a few exceptions, including military service, travel and medical procedures.
  6. Just because you are not in a state more than 183 days doesn’t mean you are a non-resident.
    The duration of your stay in a particular state doesn’t automatically establish your residency. States also look at where you spent the 183 days and what you were doing while there. Having support for the number of days is important, but this is not in and of itself determinative.
  7. Records can save or sink your case.
    Auditors in some states have gone as far as reviewing credit card swipes, toll records, cell phone records, personal and business calendars, interviewing doormen, and verifying doctor and salon appointments.
  8. Multiple states could tax the same income.
    Your state of domicile might not be the only state in which you are taxed. Although in some states there are credits available for taxes paid on certain income in another state, this isn’t always the case. And if not properly understood, you could end up paying taxes on the same income in multiple states.
  9. Proactive planning is critical. Understanding the rules in advance of a move can save a lot of hassle and potential taxes later. Have a file and your records prepared if you think there may be a question about residency. You should know in advance what a state auditor will look for and what questions they will ask to show your true intent to relocate.
  10. Questions to ask yourself.
    Is my true intent to move and not return? If so, do I have a solid understanding of what I need to do in both states to ensure I can support my intention with documents and records to establish a new domicile and end domicile in the prior state?

By taking the time to understand your move’s possible tax implications, in both the state you are moving to and the one you leaving, you’ll be able to minimize any surprise state taxes. If you have questions about the tax implications of a residency change or need help with tax planning to mitigate unforeseen taxes, contact our experts.


February 22, 2021

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