Changing your state of residency can have a significant effect on your tax bills. Within the U.S., there are nine states that do not require residents to pay income tax, including:
- New Hampshire
- South Dakota
Although moving to these states in the past was an attractive idea, now, it’s even more appealing since many people are working remotely. Prior to the pandemic, this would not have been an option for most people. Now, more and more people are considering making the move.
Tax residency rules vary by state. Changing your residence usually requires a determination of domicile, which involves a qualitative assessment of factors other than just the location. A domicile is defined as the place assumed to be “home” and where a person wants to eventually return, even if they are temporarily residing elsewhere. Unless affirmatively changed, the domicile will remain constant, defaulting to the last location where it was established.
The state in which you live has considerable tax revenue potential associated with your residence there. Thus, if you wish to change your residence to another state, your current state may challenge you with an audit. Domicile audits are time consuming and require much documentation, so be prepared in case your prior state of residence comes back to initiate an exam.
Documenting domicile requires proof of factors defined by state laws and regulations or rulings. Many states consider the numbers of days spent “in state” as a determination of domicile. Representative factors include time spent, location of family and business connections, and leisure activity locations.
These factors vary by state, so it is critical one understands the guidelines for the state in question. In the event of an income tax audit, you will want to ensure these factors weigh in favor of the desired current domicile state.
The place of domicile must be distinguished separately from the concept of tax residency, which is usually determined in part by assessing the amount of time spent in a state. States like New York claim the concept of statutory residency, which is defined as anyone spending more than 183 days in the state and having a year-round home to file tax returns as a resident. The individual may or may not necessarily claim New York as the state of domicile. Statutory residence takes into effect the other qualifying factors apart from where one spends time in a particular place.
If you have the option of working remotely and want to explore the possibilities of changing your state of domicile, we can help. Connect with us for a thorough evaluation of relevant laws so that you can move ahead with your plan to save taxes!