Moving to a Lower Tax Neighborhood: Breaking State Residency

Many people look for warm and sunny climates when evaluating potential states in which to live and retire.  In addition to the warmth and sunshine, certain states may be attractive because of lower, or no, individual income tax.  Florida, Texas and Nevada, for example, impose no personal income tax and offer sunny weather.  While many individuals may be intrigued by the prospect of not paying a personal income tax, no longer being taxable in one state and establishing residency in another state requires much more than a simple declaration.  This article will provide analysis of the issues associated with such action.

States’ Constitutional Power to Tax Individuals

Generally, states possess and exercise the power to tax all income of resident individuals regardless of the source because the resident enjoys the “privileges of residence in the state and the attendant right to invoke the protection of its laws.”[1] Similarly, states have the right to tax income of a nonresident from sources within the state, due to the protection provided to “persons, property, and business transactions within their borders.”[2]  However, the power to tax income based on source is more limited and must yield to the state of residence whenever there is a conflict.  As a result, the determination of a taxpayer’s residency is central to calculating the extent of an individual’s tax liability. 

“Domicile” vs. “Resident”?

Generally, an individual will have residency with a state if that individual is domiciled in the state or otherwise has a permanent presence in the state be to be regarded as a resident for personal income tax purposes.  An individual’s domicile is where that individual considers his or her true, fixed, permanent home and where he or she intends to return whenever absent.  There is a key distinction between a domicile and a residence/abode because a taxpayer can have multiple residences but only one domicile. 

The determination of one’s domicile is a question of fact and circumstance.  A taxpayer’s true intention of where his or her home is located will be evidenced by his or her actions and words.  In order to change one’s domicile there needs to be a physical presence at the new location and an intention to make such location one’s new domicile.  Some of the key factors that indicate where an individual maintains his or her domicile include, but are not limited to:

  1. Abodes/Residences (number, size, value, nature of use)
  2. Active Business Involvement (employment, business interests)
  3. Physical Presence (number of days present, living pattern)
  4. Family Connections (location of spouse/children)
  5. Location of Valuable and Sentimental Property (family heirlooms, etc.)
  6. Acts of Citizenship (voter registration, driver’s license, etc.)
  7. Community Involvement (club membership, participation in civic and charitable organizations)
  8. Professionals (doctors, attorneys, accountants)

Alternatively, an individual may also be deemed a resident for personal income tax purposes in a state outside of his or her domicile if the individual maintains a permanent presence or residency in a state.  For example, states may also assert residency if the individual is present for other than a temporary or transitory purpose; the individual is present for a specified period such as 183 days or more; or the individual maintains a permanent place of abode in a state. 

The principal distinction between domicile and residence is that domicile requires both physical presence in the state and the intent to make that state one's home, whereas residence requires only physical presence of some permanency.  Therefore, an individual could be domiciled in California but have enough physical presence in Georgia to be required to file as a resident in both Georgia and California.  Note that this individual should not be subject to double taxation because of state credit mechanisms. 

Do it right!

The key is having a domicile and residency in the intended state – say a state without a state income tax.  For instance, if an individual has lived in California all his life, has a nice home, family treasures and is surrounded by a loving family, buying a 1200 sq foot condo in Las Vegas does not necessarily make you a domicile and resident of Nevada.

Under audit, an individual may be required to complete a nonresident questionnaire and furnish appropriate documentation.  Further, auditors will be focusing on whether the individuals have actually severed ties with the former state and created new ties in the new one. For instance, auditors will be more critical of a claim of change in residency if an individual still maintains a home or residence in their former state.  Affirmative actions, such as selling one’s home, moving one’s family, or applying for a driver’s license in a new state, can strengthen a change-in-residency argument.

As mentioned above domicile is in large part based on intent.  Intent can be difficult to prove at a point in time.  However, intent is easier to establish based on subsequent actions.  If an individual moved from California to Nevada in 2011 arguing that Nevada was now the domicile the state would have the benefit of hindsight to see how much time the person in question actually spent in California over the subsequent years.

Moving from California to Nevada

To help illustrate how a taxpayer would change residency, let’s assume a business executive decides to leave the hustle and bustle of Los Angeles for a peaceful desert oasis in Nevada. 

In California, a “domicile” is “the place where an individual has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning.”[3]  Further, an individual will continue to maintain a domicile in California until he or she acquires another domicile elsewhere.  The key feature of a domicile is the intention to return regardless of the length of time or reason for the absence from California. 

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.[4]  Further, a spouse accompanying the absent individual will be afforded the same residency status.  Lastly, returning to California for not more than 45 days during a taxable year will not affect the nonresident status of the taxpayer or spouse.

In addition to having a domicile in the state, California Rev. & Tax Code § 17014 will also deem an individual, who is in the state for other than a temporary or transitory purpose, as a resident for personal income tax.  Similar to a determination of domicile, 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.[5] 

California FTB Informational Publication No. 1031 provides guidelines on California residency issues.   It notes that an individual’s declaration of residency in another state does not relinquish residency in California.  There is a rebuttable presumption that the taxpayer is a resident unless the individual can establish that he or she is outside of California for more than a temporary or transitory purpose.  An individual can generally rebut this presumption, if his or her close connections are outside of California.

For the executive to in fact be domiciled in and a resident of Nevada, he must show strong ties with Nevada.  He should spend the majority of his time in Nevada while spending minimal time in California; establish the Nevada residence as his principal residence by moving his spouse and children; obtain Nevada voter and driver’s registration; register his vehicles in Nevada; join civic and religious organizations in Nevada; and perform any other activities that will establish a close connection with Nevada.  

California Regulation 17014 provides that 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.  Note that claiming to be a nonresident will not prevent California from taxing California source income and any such California source income should be reported. Likewise, if no income was received from sources within California, that fact should be stated on the return.

If the California Franchise Tax Board (“FTB”) is satisfied the individual was a nonresident based on the statement and evidence submitted, the tax will be computed only upon the income, if any, from California sources. However, the FTB has been notorious for challenging residency.   In any event, the individual will have the opportunity before his status as a resident or nonresident is finally determined to submit additional evidence either in writing or at an oral hearing before the FTB or its representatives.

Conclusion

While individuals may be attracted by the potential tax savings from changing their residency to a state that does not impose a personal income tax, those individuals should be warned that achieving such a goal is not necessarily a simple task.  In order to no longer be domiciled or resident in a state, an individual will have to sever most ties with that state.  Even if an individual has taken affirmative steps towards establishing stronger connections in another state, there is a strong likelihood of significant resistance from the former state of residence, which will be reluctant to lose revenue. 

For more information concerning personal income tax residency issues, contact a local CBIZ MHM tax advisor or the following individuals at CBIZ MHM National Tax Office.

Craig Williams
Director
National SALT Practice Leader
cwilliams@cbiz.com
(770) 858-4464

Todd Harke
SALT Senior Manager
tharke@cbiz.com
(770) 858-4465

Sarfraz Bacchus
SALT Manager
sbacchus@cbiz.com
(770) 858-4454


[1]  New York ex rel. Cohn v. Graves, 300 U.S. 308, 312 (1937).

[2]  Curry v. McCanless, 307 U.S. 357, 368 (1939).

[3]  Cal. Code Regs. 18 § 17014(c).

[4] Cal. Rev. & Tax § 17014(d)(2).  However, such an individual will be considered a resident if the individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect or the principal purpose of the absence from California is to avoid personal income tax.

[5]  Cal. Code Regs. 18 § 17014(b).


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