Individual Income Tax Insights: Crossing State Lines - Where Are You Domiciled?

As the tax season fast approaches, residency is an important topic to evaluate when preparing your state individual income tax returns. Where you are considered to have established domicile, not just where you currently live or work, is what determines your residency status. But your mere opinion on the matter, however, won’t necessarily stop more than one state from taxing your income.

Most states determine residency by the establishment of domicile, which is defined differently in each state but equates to very similar terms. In the majority of states, an individual establishes domicile when a permanent place of abode is maintained with the intent to return to the state after a period of absence. 

In Alabama, for example, if an individual spends, in the aggregate, at least 7 months of the taxable year within the state, residency has been established. Similarly, in Arkansas and Colorado, a taxpayer is considered to have established residency if in the aggregate more than 6 months of the taxable year is spent within the state. Other states, such as Connecticut and Delaware, as well as the District of Columbia, define residency as an individual domiciled in the state in the aggregate for more than 183 days of the taxable year.

There are all sorts of intricacies taxpayers should be aware of with regard to residency that may place them in a bit of a predicament when filing their state income tax returns. If a taxpayer maintains residency in more than one state throughout the taxable year, for example, both states may claim territory to the total income earned for the year. Even if you don’t reside in a particular state, but earn a certain amount of money there, that state will likely tax those earnings. 

Further, a state where you have established domicile may want to tax your entire income regardless of the state in which it was earned. In Alabama, domiciled individuals are subject to income tax on their entire income, regardless of their physical presence in Alabama or where that income was earned.

Also, individuals who move during the taxable year may find themselves subject to a residency audit, as seen in California Franchise Tax Board v. Hyatt. Domicile only ends when abandoned, but even if a taxpayer expresses intent to do so by establishing domicile in another state, the state where he or she previously resided may decide its income tax applies to that individual’s taxable income. 

States, just like anything else, are in competition for your business, and in this case, your residency. Some states may seem more attractive to taxpayers based on the fact that they have lower income tax rates or no income tax at all - such as Florida. But whatever the particular reason may be, people often move from one state to another. The states with the highest rate of individuals moving out for the last three consecutive years are New Jersey, New York and Connecticut, according to Forbes. Individuals should consider the tax implications of such a move during the taxable year.

Suffice it to say, the topic of residency can be quite complex and varies in specifics, as well as complexity, in different jurisdictions. It is important that taxpayers consider the particular rules and laws surrounding residency that are applicable to the states in which they work, live, and are domiciled.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should there be uniform residency rules for all jurisdictions?

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