If you live in New Jersey, New York, Connecticut, or California, you may have started questioning whether it’s worth it to uproot and move to a state with lower property or income tax. Residents of these high property and income tax states were hit hard by the new state and local tax deduction cap of $10,000 put into place by the Tax Cuts and Jobs Act. Before scouring the internet for “best places to live”, let’s take a look at a few things to keep in mind when changing domicile for tax purposes.
What is Considered as a Domicile?
Domicile should be thought of as your fixed and permanent home – the place that you intend to return to after a period of absence. Changing your established domicile takes more than just moving to a new location. For state tax purposes, you’ll want to ensure you can provide convincing evidence of a domicile change.
Determining a Domicile Change
The two main aspects that help establish a domicile change for tax purposes is physical presence in the new state and the intent to make the change. Proving physical presence is straight forward enough but proving the intent to leave can be difficult – especially if you retain a home in the state of domicile where your principal residence was previously located.
Factors to Consider
New York State often challenges domicile changes and, in conducting residency audits, will usually focus on a few primary factors to make their determination of domicile, such as:
- Residences – Number, location, maintenance, and nature of use;
- Employment and Business Involvement – Retention of control, supervision, pattern of activity in old resident state, and passive versus active involvement;
- Time – Number of days in new state versus old state and duration of visits made to the old state;
- Sentimental Items – Physical location of your “near and dear” items; and
- Family Connections – Usually considers location and activities of a spouse and minor children.
There are some secondary factors that the state will look to if they can’t make a determination of changed domicile based on the primary factors alone which include:
- Location of safe deposit boxes and auto registration and licenses;
- Where you’re registered to vote;
- Address where you receive bank statements, bills, and other business and financial communications;
- Reviews of phone, cable, and utility bills at each residence.
Document, Document, Document
There are quite a number of steps that can be taken to properly document a change in domicile in the event your domicile is challenged by the state tax authorities. A few measures you can take to show a change in domicile for tax purposes are owning a home in your new state, selling or gifting your previous residence, applying for a driver’s license in the new state and surrendering the license from your old state, and filing final year resident tax returns in your old state.
If you’re considering a move, it’s important to plan early and involve your Untracht Early tax advisor in the conversation to ensure the appropriate steps are taken to demonstrate your intent to change your domicile for tax purposes.