Be Mindful of Any Planned Moves: How Residency Affects State Tax Obligations
As more options become available to work virtually, people are considering where they want to maintain a home or “domicile,” both for convenience and for personal fulfillment, since they may no longer be strictly tied to working from an office. One of these considerations may be moving to a state with lower taxes, particularly in the wake of changes made in the tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA). Before planning a move to another state, it is important to understand the concept of “domicile” or “residence,” and how these are defined for state and local tax purposes to avoid unwanted attention from states desperate to find revenue during this pandemic.
Commit to the New State
In order to successfully change a state of residence, it is helpful to have a clean break with the former state. There must be an expectation that the move is not of a temporary duration. You must consistently report your new address for all purposes (both for tax and non-tax purposes), for your new home to be considered a new “residence.” For example, you should cancel your property tax homestead exemption in the state in which you were living, and change your permanent mailing address before claiming a different residence for income tax reporting, or else you leave yourself exposed to unwanted tax complications.
It is important to distinguish where you live and where you are considered “domiciled/resident” for tax purposes. Factors that determine residency include, but are not limited to:
- Activity that demonstrates taxpayer intent for the future including business arrangements,
- Family connections, and
- Community involvement.
Also, time spent is a determining factor for statutory residence purposes and those rules vary among the states. Typically, if a taxpayer spends more than 183 days in one location, he or she may be regarded as a “resident” for income tax purposes. This makes tracking time you spend in each jurisdiction very important. Taxpayers must keep detailed records and carefully evaluate each property they own/lease. Before you move, talk with your tax provider about how your facts will be interpreted for state and local tax purposes.
Monitor Your Facts Now To Dismiss an Audit Later
Residency audits can be very time consuming and costly. Be cognizant of how present and future plans affect state and local tax obligations, and keep contemporaneous documentation of both personal and professional arrangements that support filing positions. Remember, real estate benefits may only be available in the state you consider your “primary” residence, so be careful to update records accordingly.
For Additional Information
Contact a member of our state and local tax team for more information. Published on August 24, 2020