Hilari Pickett
March 20, 2025
Practitioner’s Tax Action Bulletin® Advisory
Tax practitioners frequently consult with clients who are moving, or considering a move, to a new state. Relocations are often driven by significant life events such as a change in family situation, a new job, or retirement, but may also be motivated by the desire to reduce state tax burdens. Based on data from the U.S. Census Bureau, approximately 7.6 million people migrated between states in 2023. California had the highest net outbound migration with a net loss of 268,052 residents, followed by New York, with a net loss of 178,709 residents. Texas had the highest net inbound migration of any state, with an overall increase of 133,372 residents, followed closely by Florida, with a net gain of 126,008 residents.
Residency Status Matters
Residency status determines how much of a taxpayer’s income is taxed by a particular state. States generally tax residents on worldwide income and nonresidents only on income sourced to the state. State residency also determines whether a state can assess estate or inheritance taxes. Several of the top destinations for migration in 2023 were the states of Texas, Florida, and Nevada, none of which impose personal income, estate, or inheritance taxes on residents. Establishing residency in a state with lower tax rates can result in substantial tax savings!
High-tax states like California and New York are becoming increasingly aggressive in challenging taxpayers on residency changes. For instance, New York collected approximately $1 billion by winning 52% of the 15,122 residency audits conducted between 2013 and 2017, according to a Freedom of Information Act report obtained by Bloomberg. By advising clients on the factors to consider and the steps they should take, practitioners can help them successfully navigate a change in state residency.
The Domicile Test: Facts and Circumstances
The exact definition of domicile varies from state to state, but in general, domicile is the individual’s true, fixed, and permanent home and the place to which the individual intends to return, even while residing elsewhere. A person may have more than one residence but can have only one domicile. If a new domicile is not satisfactorily established, the individual may continue to be subject to income, gift, and estate tax as a resident of the state from which they have moved. Once a domicile is established, it remains the same unless the taxpayer takes steps to affirmatively abandon that domicile and establish a new one. The taxpayer must be able to show that they have both left the old state and landed in the new state. The more time that passes after a move, and the more steps the taxpayer takes to establish domicile in the new state, the more difficult it will be for the old state to assert that the individual has domicile there.
Home. To strengthen the claim of domicile in the new state, best practice is for the taxpayer to sell the family home in the old state. Maintaining a residence in the former state can complicate the claim of domicile change, especially if there is a strong emotional attachment, such as raising a family, or significant length of time residing in the home before the move.
Business. Frequent travel to the former state for business purposes may raise questions about the permanency of the move and the location of primary business activities. To strengthen the claim of a new domicile, the taxpayer should minimize travel to the former state, especially if such travel is related to ongoing business operations or client meetings. If travel is necessary, it should be clearly documented and justified as occasional or transitional rather than regular or essential to the business.
Time. The taxpayer should spend significantly more of their time in the new state, indicating that it’s the primary place of residence. It’s not enough to merely spend slightly more time in the new state than in the old one. Time spent outside of both states should also be limited in the period following the move, as it will weaken the argument that the taxpayer has established domicile in the new state. The time factor also includes the quality of the time spent. For instance, where the taxpayer celebrates holidays, family events, and other significant occasions may be an indication of their true home base and emotional ties.
Note: The time element of domicile is not the same as the 183-day test that many states use for the statutory residence test, which is discussed later.
Near and Dear. This factor involves evaluating the location of cherished personal belongings with sentimental value, like a child’s favorite toys, family photos, artwork, antiques, and safe deposit boxes. Whether possessions from the old home are moved to the new one or kept in storage also matters. Where pets are cared for and boarded, including their veterinarian’s location, points to where daily life is centered.
Family. Generally, where the taxpayer’s family resides is a strong indicator of domicile, especially when there are minor children. Where the children attend school and engage in extracurricular activities is a very persuasive factor in favor of domicile. Even when a taxpayer moves to a new state for work, frequent returns to the old state due to family ties can influence the determination of domicile, potentially resulting in the old state being considered the primary residence.
Observation: States often presume spouses share the same domicile. While it’s possible for spouses to have separate domiciles, this typically requires substantial time living apart.
Other Factors. Although generally not as heavily weighted in the analysis as the other factors discussed, there are several additional factors that contribute to the determination of domicile. These factors typically become important only if a taxpayer neglects to do them, and these changes should be made as soon as possible after moving. Driver’s licenses and other official documentation should be changed to the new state; relationships with professionals like doctors, accountants, and attorneys should be established in the new location. The taxpayer should also build social connections, participate in community activities, shop, dine, and engage in recreational activities in the new state to demonstrate that daily life is centered there.
Statutory Residency
For purposes of determining personal income tax liability, some states define a resident to include an individual who is not domiciled in the state, but who maintains a permanent place of abode there and is in the state for a certain amount of time during the tax year. There are generally two components to the statutory residency test: permanent place of abode and days spent in the state.
First, the state will look to see if the taxpayer has a permanent place of abode in the state. Exact definitions vary by state, but generally, a permanent place of abode is a residence (building or structure where a person can live) that the taxpayer maintains (whether or not they own it) for substantially all of the tax year and that is suitable for year-round use, even if the individual stays there only occasionally.
Second, states will review the amount of time the individual spends in the state. Many states have a presumption of residency based on the so-called “183-day” rule. Generally, a “day” in a state is considered any part of a day an individual is physically present in the state, although some states have exceptions for travel through the state. If an individual can’t prove their location on a particular day, an auditor may assume that person was in the state. With modern cell phones and technology, the best method for documentation is one of the many automatic tracking applications, such as TrackingStates, TaxDay, TaxBird, or Flamingo, that use a phone’s GPS to track the number of days spent in each U.S. state.
Planning Tip: Clients with vacation homes could inadvertently run into statutory residency issues, even when they have never been a resident of the state in which the vacation home is located. Practitioners should inform clients of the risk and advise them to track their time in the state, particularly when a client works remotely or after a client retires. Remote workers and retired “snowbirds” often don’t realize they could end up being taxed as residents of both states when both the domicile and statutory residency rules are applied.
Conclusion
Navigating state residency for tax purposes is a complex and multifaceted process. As more individuals relocate for personal or financial reasons, understanding and advising clients on the intricacies of domicile, statutory residency, and the specifics of each state’s tax laws becomes increasingly important.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as Tax Action Memo (TAM -2299), Issue 24, first published December 24, 2024, along with other valuable tax practitioner articles. to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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