Why is your residency important?

Similar to the federal income tax, a state in the United States may impose personal income taxes on the state residents of world-wide income regardless of where the income is from. Nonresidents are taxed only income attributable to (“sourced to”) that state. Part-year residents are taxable on their world-wide income while a resident of the state and only on income from the state source while nonresident. States do not follow the rules of the federal income tax to determine the state residency. Generally, states are not bound by income tax treaty entered into by the United States with other countries. Therefore, a person domiciled in the state may be subject to state income tax even if the person is exempt from federal income under a tax treaty. There are no “to be not to be” choice for state residency. Determination of the state tax status of an individual often requires an extensive review of the facts and circumstance of where they live and work and how a change of residence was made.

What is your tax residency for state tax purpose?

State residency requirements vary from state to state. Generally, most states define a resident as an individual who is in the state for other than a temporary or transitory purpose. States consider you to be tax resident if you are either “domiciled” in the state or otherwise you are a statutory resident if you physically present in the state for a certain period of time. For example, New York State “resident individual” is a person who is legally domiciled in New York without regard to the amount of time he or she may spend in the state. An individual who is not domiciled in New York is treated as a resident for income tax purposes if he maintains a “permanent place of abode” in the state and spends more than 183 days of the tax year in the state. New York excludes individuals who are domiciled in New York as residents if they (a) maintain no permanent place of abode in the state (b) main a permanent place of abode elsewhere and (c) spend no more than 30 days during the tax year in the state. Such individuals are treated as nonresident for state income tax purpose.

How domicile is determined?

Domicile, in general, is the place where an individual lives as a fixed and permanent place of abode in which the person intends remain indefinitely or to which such individual intends to return whenever absent for a period of time. The determination of where the taxpayer is domiciled in the state is largely a mater of intention. The subjective intent is typically inferred from objective indications. Some of major factors in determining whether a person is domiciled in the state include, but are not limited to:

•  either own or rent fixed and permanent adobe
• perform active business activity (employee or business owner)
• physically present in a state (number of days)
• where Family members live
• driver license & auto registration
• register to vote
• use address for tax filings
• open bank account
• obtain professional and business licenses
• join professional association

The determination of the place of domicile depends upon all the facts and circumstances in each case and in each state. It is determined by totality of the circumstances and no one factor is determinative. The determination of domicile is a question of fact rather than law, and the rule and case law in each state may differ, one person may be determined to be a domiciliary in the state by more than one state although a person may have only one domicile,

How to change your domicile?

Once an individual is domiciled in a particular state, this status remains until the individual establish a new domicile in another state or country. As domicile requires a permanent and fixed place of abode, a person can still be considered to be domiciled in the state if the person has not yet established a new permanent resident elsewhere. In order to establish the change in domicile, the taxpayer must establish:

• new fixed and permanent adobe in the new state,
• intent to abandon your domicile in the previous state
• intent to return to your new home.

It is not enough for taxpayer to move out of the state. You must have cut off your old ties to the sate and established a new one elsewhere. You must show your intent by taking some or all of the actions mentioned above. You must take action to sever all relevant ties with the previous state.

•  Sell or rent out house in the state
• Abandon homestead property tax break
• Surrender rights and privilege for residents
• Move family to the new sate

If you have to maintain significant ties with the old state for one reason or another, you should avoid to do:

• Retain residence in the old state
• Keep business connections in the old state
• Spend a significant time in the old state
• Keep personal items in the old residence
• Maintain family and social ties in the old state
• Keep membership in the old state

The taxpayer must bears the burden of prove that his or her domicile has been changed. Auditors can look at where the individual spends time and for what purpose. They may compare daily expenditures made at each location. They may investigate expense account records, credit card receipts, utility bills etc.

What is Statutory Residency?

Individual who is domiciled outside a state may be characterized as state residents for income tax purpose if the individual maintains a permanent present or residency in a state, and is present in the state for other than a temporary or transient purpose, and was physically present for a specific period such as 183 days or more in a taxable year. The statutory residency is determined year by year.
These are two entirely separate requirements for the statutory residency. The first requirement is a permanent place of abode maintained by the taxpayer. A permanent place of adobe (PPA) is a dwelling place of a permanent nature. A “PPA” generally does not include properties leased to unrelated parties for a period during which the individual has no right to occupy any portion of the premises. The taxpayer must generally maintain a permanent place of adobe by paying for all its upkeep without regard to the taxpayer’s actual use. So a vacation home is a permanent place of adobe can and therefore can result in a nonresident being taxed as a resident even the taxpayer used it as home occasionally.
The second requirement for statutory residency–spend more than 183 days of the taxable year in the state. Most states count any part of a calendar day spent in the state towards a day for the presence test. A 10 minute shopping in the state will be counted. However, transient presence may be disregarded if it is solely for the purpose of boarding a train, plane, ship or bus for travel to a destination of outside the state.

Dual Residency

A person may be considered a statutory resident of the state in which he/she currently lives but still be considered domiciled in another state to which he/she intends to return. There is nothing to prevent two states from each independently determining that an individual is a resident in each respective state. The constitution does not prohibit double taxation when two states each reach the conclusion that it is the taxpayer’s state of residence. This can occur when an individual tries to change his domicile unsuccessfully, or when a domiciliary in a state owns a fixed permanent place of adobe and spend days over the statutory threshold of the state. It occurs when a taxpayer has two or more homes in different states and maintains ties with more than one state. Therefore, an individual may be subject to double taxation of his or her income on residency basis of two states.

Record keeping

Individuals who relocate to other state or individuals with residence outside their domicile state should maintain accurate, reliable record to support the contention that they are not residents of a particular state and retain such documents for years based on statute of jurisdiction limitation. Nonresident individuals with presence in a state bear the burden of proof that the taxpayer presented outside the state for statutory residency purpose. If a taxpayer is deemed by tax authority to be a tax resident of a state or intentionally changes his domicile, failure to file an income tax return in a state keeps the statue of limitation for the state to assess tax open indefinitely.

Appendix: California State Residency Rule

In California, tax resident includes any individual who is (a) in California for other than a “temporary or transitory purpose” or (b) is domiciled in California, but physically located outside California for a “temporary or transitory purpose”. Whether or not the purpose for which an individual is in California will be considered temporary or transitory in character will depend to a large extent upon the facts and circumstances of each particular case. It generally encompass individual physically present with the state for a particular purpose of a specified duration. Time spent in California is only one fact to be considered as an indication of the purpose. Presence in California for less than 6 months of the taxable year is presumed to be temporary or transitory for individuals who are domiciled outside California and maintain a personal residence outside California. An individual who spend, in the aggregate, more than 9 months during the tax year with in California is presumed to be a resident. Nevertheless, the presumption may be overcome by competent evidence otherwise. If an individual is simply in California for a vacation, to complete a particular transaction, or to perform a particular contract, or to fulfill a particular engagement, the individual is deemed to be present in California for “temporary or transitory purpose” and will not be considered as a resident by virtue of their physical presence. On the other hand, if an individual who presents in California for employment that may last indefinitely or individual who arrives in California with no definite intention of departure, are deemed present for other than a temporary or transitory purpose and will be deemed as residents. The term “nonresident” includes every individual other than a resident. In addition, California rules treat individuals that are domiciled in California but who are outside of the state for employment-related contracts for an uninterrupted period of at least 546 consecutive days as a nonresident. Annual Return to California for not more than 45 days during a taxable year will not affect the nonresident status of the individual.
For example, an individual’s declaration of residency in another state does not relinquish residency in California unless the individual can establish that he or she is outside of California for more than a temporary or transitory purpose. If an individual is presumed to be a resident during the taxable year but believes he or she is a nonresident, then he or she should file a return stating that position. The return should be accompanied by a signed statement setting forth in detail the reasons why the individual believes he was a nonresident accompanied by any evidence including certificates, affidavits, etc. indicating that he was not a resident.