You’ve said your goodbyes and your furniture and household goods are on a truck. Soon you’ll be heading to Austin, Texas, ready to enjoy the warm weather and slower pace of life. You may not have given much thought to what your move might mean for income and estate taxes. But you should, particularly if you are one of the many people moving to Austin from a high-tax state such as New York, New Jersey or California. Merely moving doesn’t necessarily change your state of domicile, as explained in this recent article from Nerdwallet.com.
Your state of domicile, or residency, determines where you pay state personal income tax, as well as estate taxes when you pass away. Typically, domicile is defined as the state where an individual maintains a permanent abode and where that person intends to return from any absence. An individual can have only one domicile at a time.
Residency audits are on the rise
In the last few years, states discovered that many taxpayers would purchase a home out of state and claim the new state as their domicile, while still maintaining significant ties to their former home state. States wisely concluded that sometimes the change in location was more of an effort to reduce state tax liability than to make a permanent move. This resulted in an increase in residency audits. And they are likely to continue: New York State alone collected about $1 billion from residency audits from 2013 to 2017.
Residency audits focus on the facts and circumstances of your move from one location to another to determine whether you have met the burden of establishing your intent to make the new location your permanent home. You are at a higher-than-average risk of a residency audit if one or more of the following applies to you:
- You moved to a state with a much lower tax burden.
- You still have a home or business ties in the old state.
- You moved shortly before selling a business, significant investments or some other valuable asset.
- You’re in a high tax bracket.
A large percentage of residency audits involve situations where a taxpayer maintains more than one permanent abode. An example would be a couple who splits time between their home in New York, where they raised their children, and their downtown Austin condo. (New York has high income taxes and an estate tax, while Texas has no income tax or estate tax.) New York State would be interested in two fundamental questions to determine domicile in this scenario: (1) Which state does the taxpayer intend to be their residence, or domicile? and (2) Where does the taxpayer have the greatest connections?
What factors determine domicile?
If you are contacted by a taxing authority for the purpose of conducting a residency audit, you should be prepared to provide evidence that Texas is indeed your domicile. There are numerous factors that states may review to determine your domicile:
- Where are registered to vote?
- Where do you maintain a driver’s license and vehicle registration?
- Where do you have a homestead exemption?
- Where do your spouse and children live?
- Where do you have active bank accounts, banking relationships and a safe deposit box?
- Where do you spend the greatest amount of time?
- Where do you have doctors, lawyers and accountants?
- Where do you own a cemetery plot?
- Where do you worship regularly?
- Where do you participate in social, fraternal or athletic organizations?
- Where do you keep works of art, furniture, family pictures or heirlooms?
- Where do you receive mail?
- What address is on your federal and state tax returns?
- Where are you employed?
- Where do you maintain professional licenses?
- Where do you conduct business?
- Which state’s law do you specify in your estate planning documents?
States will look at these factors and other facts and circumstances to challenge your claimed state of domicile.
Some states also subject statutory residents to their taxes. Statutory residence is determined simply based on the amount of time in the state. A typical rule considers an individual a statutory resident unless the person spends more than a certain number of days outside the state, typically 181 to 183. Taxpayers should keep good records of time spent in each state, which includes travel receipts and receipts of monies spent in the states. However, some states will deem you a statutory resident even if you spend more than the required number of days out of state if you spend more days in the state than in any other state.
The bottom line
If you’re going to claim Texas as your a new domicile, you need to actually cut as many ties with your old state of residence. Merely buying a house here in Austin is often insufficient.
If you’d like to read more about the flight from the Bay Area to Austin, Texas, this article provides a number of examples. Companies move for a number of reasons – including availability of talent and lower costs (not just taxes).
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.