When it comes to slamming the tax hammer on the wealthy, one area government officials are intently focusing on is state residency. Specifically, when is someone legally a resident of a state or other tax jurisdiction and subject to its taxes?

Inquiries into such matters usually start with a state residency audit, which can be as simple for a taxpayer as filling out a questionnaire or as complicated as answering repeated and onerous requests for information and documents.

The dollars at stake in a residency audit can be staggering. If a state successfully establishes that an individual is a resident, it will generally apply its tax rate to 100% of the individual's taxable income for the year, with credit given for taxes paid to other states only when the taxed income was derived in the other state. The taxes owed can be particularly high in states that have enacted so-called "millionaire" brackets that tax all income above specified thresholds at particularly high rates.

Residency Definitions
The term "resident" is not uniformly defined by all states. Most states assert the power to tax someone as a resident if he is domiciled in the state. "Domicile" is an ancient common law term that refers to an individual's true and permanent home-the place a person intends to return to after an absence.  An individual may have multiple residences but can, by definition, have only one domicile. 

In addition to the domicile standard, states have other criteria to establish residency. The main alternative criteria are as follows:

Presence in the state for something other than a temporary or transitory purpose.

In a number of states, including California and Illinois, presence in the state for a reason "other than a temporary or transitory purpose" causes one to become taxable as a resident.  This definition is intended to cover individuals who are in the state for an indefinite period of time and have a "closer connection" to the state than to any other state during the tax year.  

Presence in the state for a specified period of time.

Some states will tax an individual as a resident solely because of the individual's presence in the state for a specified period of time, say six months to a year. In some states, his presence during that time creates a presumption that the individual is a resident for that period.  

Maintenance of a place of abode for a specified period of time.

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