An individual is subject to tax on all of their income by the state in which they are domiciled. Over the last few months, I’ve fielded numerous questions from clients (and some non-clients) about what they need to do to change their domicile to a more tax-friendly state since during the course of the pandemic they have learned that they have been able to work quite successfully remotely from their homes.
The frequency of these queries has greatly increased since the recent NYS Budget Bill passed and was signed into law, enacting some of the highest tax rates in the country. However, getting out of Dodge is not always as easy as it seems!
What Does Domicile Mean For State Personal Income Tax Purposes?
For state personal income tax purposes, the term “domicile” is used to designate the place at which a taxpayer intends his or her permanent home to be. An individual may have numerous residences, but can only be domiciled in one location. It is the place to which a taxpayer always intends to return after a period of absence. On audit, states generally examine a number of objective criteria in determining the location of what in essence is a subjective concept based on an individual’s intent. Keep in mind, in most cases taxpayers bear the burden of proving that they have, in fact, moved their domicile. In New York, individuals must carry that burden by demonstrating “clear and convincing” evidence of a change in domicile.
How States Determine the Location of a Taxpayer’s Domicile
States look to a variety of factors in evaluating the location of an individual’s domicile. In the Northeast, most of the states focus on five “primary” factors during their assessment process. Those five primary factors are:
- Location, size and value of homes;
- Active business involvement;
- Time in each location (not the greater than 183-day statutory residency rule);
- Location of items near and dear;
- Location of family (spouse or partner, and minor children).
In most cases, state auditors come to a domicile conclusion based on the primary factors. It is not simply a question of which side (the state or the taxpayer) has the majority of factors in their favor. Each case is evaluated on the particular facts at issue. For example, a taxpayer may spend 180 days in State A where his family is located in a $2 million dollar home, filled to the brim with the family’s near and dear items, while he spends 130 days in State B (the state from which the taxpayer claims he has moved his domicile) living in a rented apartment to attend to his business located in that state. In such a case, it is likely that State B would argue that the taxpayer never moved his domicile to State A because of his home located in the state, his business connections in the state and the amount of time he spent in the state.
Somewhat less important than the primary factors are a number of “secondary” factors. Among these are the factors generally thought of as being vital to demonstrating a move of domicile. Some of these are listed below:
- Driver’s license;
- State of auto and boat registrations;
- Voter registration and exercise of the right to vote;
- Social connections;
- Religious connections.
The secondary factors usually come into play when a determination based on only the primary factors cannot be reached.
If I Move, Will I Pay Lower Taxes?
Even if a taxpayer is successful and prevails with respect to a move of domicile, their success does not always result in a lower state tax bill. For example, under New York’s “convenience of the employer rule,” an employee of a New York business who moves to another state and works remotely for their own convenience, rather than at the request of their employer, still is considered to have New York-sourced wages. The state has maintained that position even in the face of the pandemic when the Governor of the state closed businesses down forcing people living in surrounding states to work remotely from their out-of-state homes. Whether the state’s Rule would survive challenge in the courts under the current circumstances remains an open question at this time.
Taxpayers are often more successful in making a domicile change if they focus on the steps they need to take to carry their burden of proof. In particular, states tend to target high-net-worth individuals who move to no tax or low tax states. In essence, they will spotlight their audit resources on those taxpayers they least want to lose. Often, taxpayers who experience a significant life event such as marriage, divorce, retirement or a job change can have a somewhat easier time of it than those who really don’t demonstrate a significant change in their life style. Changing your domicile can be a complex process, and having a roadmap to follow often heightens an individual’s chance of success. Finding a moving company is easy, but landing in a new state is often somewhat more difficult.
If you have any questions regarding changing your domicile, please contact the auditor at firstname.lastname@example.org, or your Friedman LLP tax advisor.