Understanding the Factors that Determine Your Taxable State of Residency

Traditionally, it’s been easy for most people to identify their taxable state of residence. You own a home, you live in that home, and that’s where your residency, well, resides. Yet today, many employees work remotely or commute across state lines. Some wealthy individuals also own vacation homes. So how do state tax departments determine where your home actually is?

While each state can set its own policies regarding nexus and residency, not all states have clearly defined terms of what it means to be a resident or subject to tax in a state. Consequently, this ambiguity breeds confusion.

The most common test is the “183-day” test.  This residency test allows taxpayers to claim the state they spend over half a year in as their domicile. Although this test is well-known and widely accepted, in many states it is not actually written into law. In the more aggressive states a taxpayer may not be able to hang their hat on a travel log that provides their number of days spent at “home” and may have to prove their intent to establish domicile.

How do you prove you intended to establish a domicile in one state if you spend significant time in other states?  For some states it is as simple as maintaining a home you intend to return to after traveling, whether that means through homeownership or renting. Verification of intent to maintain and reside can be through received mail, utility bills or voter registration.

Other factors that can be used to verify your intent to return to that home is that your spouse resides there, or that your children attend a local school. Are you able to provide evidence that you or your family are involved in the community by donating to local charities, attending church or maintaining a golf or other social club membership? There are also more concrete factors, such as maintaining professional licenses or applying for homestead exemption on property taxes in your state.

This past year a taxpayer won a favorable determination from the notoriously aggressive New York Division of Tax Appeals. This taxpayer was a corporate executive that accepted a new job and relocated from New York City to Dallas, Texas. While he maintained his New York City apartment, he moved his residence to Texas. The basis of his defense is that he moved his lifestyle along with his residency to Texas, despite maintaining property in New York. Through the eyes of New York, maintaining a “home” that is still accessible to the taxpayer is sufficient to establish a domicile in the state and be subject to state income tax. The taxpayer was able to tell a compelling enough story regarding his move that he intended to change his residency and domicile to Texas. The key factor in the defense of his position was that he moved his beloved dog with him to Texas. So in this case, home is where your dog is can be sufficient evidence to support your intent to reside in one state over another.

At the end of the day, home is where the heart is and in the case of state income tax, you may need to gather evidence to show where your heart truly lies.

For more information on our personal tax services, please contact Ashley Dunn, CPA at 703.652.1488.

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Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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