Reducing income tax burden can be the motivation for changing state and local residency. Currently, nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Remote work has made relocation a reality for many people who previously would not have been able to consider it. That has led to an increasing number of people taking the tax residency plunge.
While tax residency rules vary from state to state, changing residency generally requires a concurrent determination of domicile, which involves a qualitative assessment of factors aside from location.
Domicile can roughly be defined both as the place regarded as home and where a person intends to return, even if currently residing somewhere else. It must be affirmatively changed or will remain constant.
If not legally perfected somewhere else, domicile defaults to the last location it was established. Domicile is determined under state law and requires assessment of a change by referencing both the state the individual intends to change domicile to and the state they are changing from.
The state in which an individual was last domiciled can have a considerable tax stake riding on that determination and may aggressively challenge that determination through audit.
Domicile audits are time consuming and highly fact sensitive, so it is wise to be prepared with supporting documentation for when the prior state of domicile initiates an exam.
It is important to distinguish domicile from the concept of tax residency, which in many cases is determined at least in part by assessing the amount of time spent in a jurisdiction. New York, for example, has the concept of statutory residency, which requires anyone spending more than 183 days in the state and having a permanent place of abode (effectively defined as a year-round home available for 11 months or more) to file tax returns as a resident. Statutory residence in New York State applies specifically in those instances where an individual is not domiciled in the state. Concepts like statutory residence highlight the fact that domicile is a much more qualitative assessment involving factors separate from time spent in a particular place.
Domicile requires a weighing of numerous factors to determine intent. These factors may be identified by state law, regulation, publication or ruling. Many states also consider a days-in-state count in the determination of domicile. Representative factors include time spent, location of those things “near and dear,” business connections, family connections and leisure activity locations.
Because the factors vary by state, it is critical that the specific factors of the respective states are taken into consideration (i.e., desired future and former domiciles). In the event of an income tax audit, you will want to ensure these factors decidedly tip the scale in favor of domicile toward the desired current domicile state.
State tax minimization is a goal of many, particularly in connection with the ability to work in a location of your choosing. Changing domicile is typically required to ensure that result, but takes a thorough evaluation of the relevant state laws in order to successfully do so.
