Before Packing the Boxes, Be Sure You Can Check All the Boxes
Since 2020, remote work has enabled many employees to move from high-tax to lower-tax or no-tax states. However, many did not achieve the expected tax savings because their employers either continued to treat them as residents of their original state or the individual did not fully sever ties with the original state. As a result, they failed to demonstrate abandonment of domicile, leading to income tax assessments, penalties, and interest based upon residency audits.
Understanding Domicile and Statutory Requirements
Before moving to benefit from lower income taxes, evaluate your situation after relocation. Some states, such as California and New York, may not recognize your move unless you change your place of employment or your employer formally transfers you. Many states, including New York, determine residency based on both domicile and statutory residency. Meeting either test allows the state to tax all your income, though credits may be available for taxes paid elsewhere.
States typically define domicile as a person’s permanent home, the place where they intend to remain long-term. It is a “state of mind” issue, turning on which state you consider yourself to be a resident of in your own mind. This is demonstrated by your physical presence and the people and things surrounding your life. Statutory residency is another way states like New York can determine residency, depending on whether a person owns, rents, or has unfettered access to a place of abode in the state and spends at least 183 days or another extended period there. Being in the state for a brief period on a single day can count toward the 183-day threshold in New York.
Demonstrating Residency
Challenging a state’s attempt to tax your income as a resident often involves a detailed audit. Auditors will review your personal activities throughout the year to determine your presence in the state. Typically, there is no opportunity to settle; the auditor will either classify you as a full-year resident or not.
Even if you prove to New York State that you have abandoned residency, continuing to work for a New York-based employer and occasionally visiting for work may result in all your wages being sourced to New York under the “Convenience of the Employer” rule.
Proving Your Residency
If you are notified or audited by a state that questions your move, you must demonstrate residency in your new state. While no state has formal criteria for establishing domicile, the following factors can help show your intent to become a resident:
- Where do you spend most of your time? States will subpoena your cell phone records to establish your physical presence throughout the year.
- Where your spouse, minor children, and other close family members reside
- If you own a business, where its operations are conducted
- Owning a home in the state. If you own two or more homes, which one is more valuable, and where do you spend most of your time?
- Where your more valuable and “prized possessions” are kept and titled
- Driver’s license and vehicle registration
- Voter registration
- Addresses on financial accounts
- Addresses used for health and life insurance accounts
- Where you visit medical professionals
- Executing contracts, wills, and trusts in a state
- Receiving important or official mail in a state
These factors are essential for establishing your intent to become a full-time resident of a new state and a non-resident of your previous state for tax purposes. Establishing residency and severing ties with your former state may require significant effort, especially when relocating for a new job and not retaining assets there. Maintain detailed, contemporaneous records documenting your reasons for moving and the steps taken to establish domicile in your new state.
If your situation is unclear, or even if you believe it is straightforward, contact your CBIZ tax professional to help ensure you are not taxed by your previous state.
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