If you’re considering moving to or purchasing a home in a different state, it’s important to be aware of applicable state taxes and their implications prior to making a decision.
States tax in different ways—some tax income and have an estate tax, while others don’t. The 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA), also dramatically reduced the amount of state and local taxes that can now be deducted on federal tax returns.
Below, we explore the types of tax statuses applicable to living situations and address three common questions that may help guide your decision.
Domicile and Residency Overview
Where you live can be classified in two different manners for tax purposes: domicile and residency.
Domicile
Domicile is defined as your permanent abode, or the place you intend to return to whenever you’re absent or traveling. A person can only have one domicile. For example, if you have a permanent home where you principally stay and a vacation home where you stay for three to four months a year, the vacation home wouldn’t be considered your permanent abode.
Residency
Residency is where you’re physically present other than for a temporary or transitory purpose. As such, domicile and residency locations may not be the same. For this reason and many others, multiple states may claim that you’re a resident under their state statutes.
For example, the California Franchise Tax Board (FTB) assumes you’re a resident if you spend nine months of the year in the state, however, spending less than nine months there doesn’t necessarily mean you’re not a resident.
New York State considers you a statutory resident if you maintain a home and spend at least half the year in the state. Washington state presumes you’re a resident if you maintain a residence for personal use, have a state professional or business license, or claim Washington as a residence for obtaining a hunting or fishing license, among other activities.
Where and how will I be taxed on income?
Your income will be taxed by your state of residency as well as states in which you derive income sourced to that state. Your state of residency can tax all of your income, regardless of whether or not the income was earned in that state. Even if you’re not a state resident, you still may be taxed on income you receive or derive from sources within the state.
Partial-year state residents—those transitioning from one state to another during the year— are taxed on all income received while a resident. For the part of the year you’re a nonresident, you’ll be taxed only on income sourced to the state. In general, many conditions may cause income to be taxed.
Do I need to worry about estate taxes?
Domicile, or your permanent home, determines the handling of issues such as estate taxes. People often fret about the federal estate tax, but forget that some states also have their own estate tax. Washington, for example, taxes estates over $2.193 million, and Oregon taxes estates over $1 million. Some states even tax the assets held in that particular state.
Fortunately, state estate taxes are fully deductible from any federal estate taxes.
How do I establish domicile or residency?
You can only have one domicile, which means you must clearly vacate your old domicile to claim a new one. Domicile reflects your intent to return to a certain location, which can be affected by several circumstances.
Helpful Actions for Domicile
There are many actions that can be taken to help establish domicile, such as changing your address on accounts, memberships, and subscriptions, and changing your car and voter registration. However, there’s no legal guarantee these activities will necessarily protect you or confirm your domicile.
State Audits and Residency Tests
Where you spend your time is important to establish residency or nonresidency, but not the only deciding factor. Cell phone and flight records or apps that track your time spent in locations can be helpful, but also can’t guarantee you’re legally demonstrating residency. Determining residency is based on the totality of facts and circumstances. As such, multiple tests are employed by state tax agencies to determine residency.
For example, California typically uses more than 20 different tests to determine one’s state of residency. More importantly, such tests aren’t equally weighted and are used in different combinations based on a person’s situation.
For this reason, it’s more important to determine how the tests may apply in totality to your circumstances rather than merely checking boxes of activities that could help. State tax auditors are well trained in this area and the growing need for capturing additional state tax revenue, as well as retaining existing revenue, is driving more states to perform residency exams more frequently.
We’re Here to Help
Deciding where you live and spend your time involves many personal factors in addition to tax considerations. However, the factors impacting your taxes can be quite complicated and require thorough assessment.
To learn more about how various states could present different tax implications or for guidance on your specific living situation, contact your Moss Adams professional.