The great state income tax escape: Not so fast
If you currently live in a high income tax state, you’d think packing up, selling your home, and buying a new home in another state would be enough to end residency. Depending upon the circumstances, you could be in for a rude awakening.
California, New York, and other high income tax states are notorious for holding on to state residents whenever they can. Why? Taxes. A state may tax the worldwide income of a person domiciled in that state. A state may also tax the income earned in that state by a resident. The words “domicile” and “residence” are often used interchangeably, but, for income tax purposes, they have very different meanings. You can only have one domicile, even though you may have more than one residence. Generally, “domicile” is defined as a permanent home in which you intend to remain indefinitely or return to. However, you can be considered a resident of another state — where you currently live — because you intend to return to the domiciliary state.
In California, if you’re residing in the state for more than 9 months, you’re presumed to be a resident.1 Even if you leave California for a job in a different state, it may take 18 months or longer for there to be a presumption that you’re no longer a California resident. So, how is domicile determined? Unfortunately, there’s no hard and fast bright line test. Some of the common factors include:
- Amount of time physically in the state. Spending 183 days or a majority of a year in another state is not necessarily determinative of domicile in that state although it is helpful.
- Place of residency — owning or renting a home.
- Homestead exemption for primary residence.
- Place of employment — if the job is typically conducted in that state. Note, that telecommuting muddies the waters because it would depend upon whether telecommuting is actually part of the job or simply a convenience.
- Place of birth or marriage.
- Location of schools attended by children.
- State of voter registration.
- State of issuance of licenses and registrations for automobiles, boats or other regulatory licenses.
- Location of family members.
- Location of bank accounts — although internet banking makes this less determinative.
- Location of safe deposit boxes.
- Ownership of real estate.
- Execution of estate planning documents, such as a will, living will, power of attorney, and health care proxy.
- Location of churches, synagogues or mosques regularly attended.
- Memberships in social or athletic clubs.
- Telephone numbers — although cellular phones make this less determinative.
- Location of investment properties.
- Declaration of Domicile.
- Location of doctors and other healthcare providers.
- Reasons for changing domicile.
Whatever your reasons for leaving a high income tax state, make sure that your new domicile is clearly established to avoid the departure state from continuing to tax your income.
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2022-142958 Exp. 09/24