Tax implications of residency changes

Residency changes are often fraught with uncertainty from a tax perspective. States are not known for easily letting go of tax revenue and will often fight hard to keep it. An individual who has been a long-time resident tax filer of one state and in a subsequent year is either a non-resident filer or does not file at all in the former state, is at high risk for audit. 

Many states tax an individual as a resident in one of two ways: as a statutory resident or a domiciliary. 

Statutory residency

Classifying as a statutory resident is generally met by a seemingly objective test, with many states adopting similar parameters. For example, both New York and Pennsylvania state that an individual is a statutory resident if the person spends more than 183 days in the state and has a permanent place of abode. Although superficially objective, many taxpayers run into issues both over what is considered a day and what is considered a permanent place of abode.

What is a day?

Generally speaking, any part of a day spent in a state counts as a day. If an individual were to enter a state and head to their office for work, catch a ballgame or meet a friend for dinner, that’s a day, regardless of the overall time. What if a person merely enters a state to catch a plane? What if they stop for lunch or pick up a traveling companion on the way to the airport? What if instead, the individual enters the state for in-patient medical treatment for a serious illness? Would it matter if the medical treatment was elective, not serious or done as an outpatient? Questions abound and need to be carefully considered when counting days towards a statutory residency test. 

What is a permanent place of abode?

Similar to the day count, we can apply a general rule: if a taxpayer has a home that is winterized, has a kitchen, a bathroom and is available for their exclusive year-round use, it is a permanent place of abode. Once again though, a plethora of exceptions and uncertainties exist. What if you have a simple log cabin with no heat or utilities in cold and snowy upstate New York? What if you bought your adult child an apartment of their own? What if you have access to a corporate apartment? Would it matter if the corporate apartment must be reserved on a first-come-first-served basis? 

Both in determining days spent in the state and whether a permanent place of abode exists, facts and circumstances matter and must be carefully considered in determining whether a taxpayer is a statutory resident. 

Domiciliary status

A long-term resident of a state is typically considered a domiciliary. While a taxpayer may have more than one statutory residence, they can only have one domicile. When considering the tax implications of a move, domiciliary status is generally where many taxpayers get tripped up, particularly because you must abandon your old domicile and concurrently establish a new one. Intent is of utmost importance. Which state does the individual intend on making their permanent home? The old adage, “actions speak louder than words” applies particularly well with domiciliary issues. There is no shortage of taxpayers that “moved” to Florida. They changed their voter’s registration, bank account address, vehicle registrations, maybe even formally declared their residency with the state, but their previous lives in their original state remained unchanged. 

It is for this reason that many states hone in on intent and often look to certain primary factors such as home, business involvement, time spent in different locations, items near and dear to the taxpayer and family connections. 

Home

A state will often look to the nature, use and size of different residences. For example, if a married couple with two young children has a sprawling estate in the suburbs of Philadelphia near the kids’ schools and a nice, but small apartment in Miami Beach, the primary home is obvious. When dealing with a taxpayer that has adult children and evenly splits their year between two similarly sized and similarly valued residences, the differences are more subtle. So, we consider another factor.

Business involvement

If the taxpayer still works, work location is crucial. Admittedly, this was often a bit clear-cut in the pre-COVID world. For example, what about a taxpayer working out of a Chicago office when home, traveling extensively for work and then heading to their home in Naples, Florida when they are able? Again, that makes for an easier finding, Illinois certainly appears to be the state of domicile in this category. However, what if the taxpayer is a remote worker with no office or retired? Business involvement then plays less of a role, so we move on. 

Time

This category often involves some overlap with a statutory residency test. If an individual has a home in Pennsylvania and by their own admission spends more than 183 days there, they are at least a statutory resident, case closed. Many individuals have multiple residences and time in one location becomes a more important factor. Often, although not rising above a 183 day threshold, more time is clearly spent at one single location when compared to other residences, but some individuals do evenly split their time between different residences, or travel extensively for work or pleasure. In such instances, the time factor might not point to one particular domicile. 

Items near and dear

Many people have items of high sentimental or economic value, whether an expansive and expensive art collection or important family heirlooms. Taxpayers commonly say, “tell the auditor that I keep everything of value in Florida.” Auditors can and do check on local residences. They tour the house and see what they find. Once again, this category is often obvious. A professionally decorated home with artwork and family photos clearly wins out over a more sparsely decorated home in Florida with bunk beds. As with the other factors, taxpayers often have similarly decorated homes. In such instances, we move on to our final primary factor. 

Family connections

This is often the most personal and intrusive factor. Familial relationships, how often taxpayers see their children or parents and where and with whom they spend holidays is crucial. Perhaps the extended family is all back home in New York and all the holidays are spent there. Maybe holidays are instead all spent in Florida, and family is scattered across the globe. Maybe once again it is an even split between states. If all of the above-mentioned factors end in a tie, then it is more important to consider other factors such as bank accounts, car registrations, voter ID or homestead property tax rebates. 

Final thoughts

Each state and each taxpayer is different. Careful consideration must be given to the statutory and regulatory provisions as well as rulings and case law of the states at issue, and equally careful consideration must be given to a taxpayer’s facts and circumstances as they relate to each state. The information detailed above is meant to be a general guide for consideration. 

For more information on this topic, or to learn how Baker Tilly specialists can help, contact Donna Scaffidi.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.