Considering moving to another state? Moving could lower your state tax bill; however, you need to establish the new state is your place of legal residence, also known as domicile, for state tax purposes. Otherwise, after moving, the old state could pursue you for taxes and your new state could expect to get paid too.
The Significance of Establishing Domicile
If you make a permanent move to a new state, it is important to establish legal domicile in that state. The exact definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and place where you plan to return, even after periods of residing elsewhere.
Since each state has its own rules regarding domicile, you could wind up in the worst-case scenario of having two states claiming you owe state income taxes. This could happen when you establish domicile in the new state without successfully terminating domicile in the old state.
Moreover, if you die without clearly establishing domicile in just one state, both the old and new states may claim your estate owes income and state death taxes. It is critical to know the rules that apply in your new and old states.
Establishing Domicile in a New State
You can establish domicile in a new state by:
1. Keeping a log showing number of days spent at the old and new locations. If possible, you should try to spend more time in the new state.
2. Changing your mailing address.
3. Obtaining a driver’s license in the new state.
4. Registering your car in the new state.
5. Registering to vote in the new state.
6. Opening and using bank accounts in the new state.
7. Closing accounts in the old state.
8. Filing a resident income tax return in the new state, if required.
9. Filing a nonresident return or no return, whichever is appropriate, in the old state.
10. Buying or leasing a residence in the new state.
11. Selling your residence in the old state or rent it out at market rates to an unrelated party.
12. Changing the address on important documents, such as passports, insurance policies, and wills or living trusts.
The more time that elapses after moving to a new state and more steps taken to establish domicile in that state, the harder it will be for your old state to claim that you are still a resident for tax purposes.
The Dog in a Recent Decision
In the facts underlying a recent decision by the New York Division of Tax Appeals, the taxpayer lived in New York City until he took a job as chief executive officer at Match.com, which was based in Dallas, Texas. Ultimately, the court determined that he was legally domiciled in Texas, because where he kept one of his nearest and dearest possessions, his dog. (In re Gregory Blatt, N.Y. Division of Tax Appeals, No. 826504, Feb. 2, 2017)
The taxpayer’s initial agreement with Match.com called for him to work in New York City. In 2009, he decided to lease an apartment in Dallas and work from the Dallas office. His employment contract was amended to show that his principal place of employment was Dallas. He kept ownership of an apartment in New York City, although it was listed for sale after he agreed to work out of Dallas. He also kept a boat in New York, which he used while vacationing in the Hamptons.
By the spring of 2011, the taxpayer had terminated his employment with Match.com and moved back to New York City. Later in 2011, he sold his apartment in New York City and moved to the Hamptons.
For 2009 and 2010, the taxpayer claimed to be domiciled in Texas and, therefore, filed New York nonresident/part-year resident income tax returns for those two years. After being audited by the New York Division of Taxation, he was charged for state and city income taxes, interest, and penalties totaling $430,065 on the grounds that New York City was his legal domicile for the entire time he was employed by Match.com.
Fortunately, the taxpayer was able to convince the New York Division of Tax Appeals that his domicile for 2009 and 2010 was, indeed, Dallas. The following factors helped persuade the court to accept Dallas as the taxpayer’s domicile:
1. He started going to the gym in Dallas, which he had never done in New York;
2. He had his prescriptions filled in Dallas;
3. He obtained a Texas driver’s license; and
4. He registered to vote in Dallas.
As it turned out, the tipping point came when the taxpayer moved his dog to Dallas in November 2009. The significance of this action was documented in an email the taxpayer sent to a friend stating that moving the dog was the final step that he had not previously been able to come to grips with. By taking the dog to Dallas, the taxpayer demonstrated that Dallas was officially his new home. The New York Division of Tax Appeals agreed, noting that moving items that are “near and dear” tends to demonstrate a person’s intention to change domicile.
Consult a Tax Professional
Unless you establish domicile in the new state and terminate residency in the old one, you could come under scrutiny by state tax authorities. Contact one of our tax advisors to discuss rules in your old and new states.