The current coronavirus disease 2019 (COVID-19) pandemic has affected day-to-day life as many self- isolate, limit venturing outside, and wear masks while social distancing. Additionally, many people are now working remotely either under government shelter-at-home orders or by personal choice. It may be that these changes are temporary and will end after a certain period. However, for some people, the experience of working from home may lead to thinking about changing lifestyles and moving from their current home and relocating as it may be possible to be productive from any location.
These types of life changes may also have business considerations. One of those considerations is how changing residence will affect an individual’s taxes. That has become even more important after the deduction of state and local taxes on federal tax returns was limited to $10,000 by the Tax Cuts and Jobs Act of 2017, making those taxes more burdensome than they had once been.
Even before the COVID-19 pandemic, many people may have considered changing their residency for tax or other reasons. For example, people living in states and localities with substantial state income tax rates may be motivated to consider a change. States’ income tax rates range up to 13.3%—with California having the highest rate. New York State and New York City residents have a combined tax rate of 12.696%, and Hawaii has an income tax rate of 11%. (There are five more jurisdictions with rates of more than 8% including Oregon, Minnesota, Iowa, New Jersey and the District of Columbia, and 24 states with rates at or approaching 5%). In addition, 12 states and the District of Columbia impose an estate tax and six impose an inheritance tax that may drive wealthy taxpayers to consider a move.
California and New York have had robust residency audit programs for many years and other states have considered residency audits. New York’s tax commissioner said the agency was seeking 100 additional auditors for its residency audits and the New Jersey director of the division of taxation also talked of increasing residency audits and hiring additional staff even before the huge reductions in state revenues due to COVID-19. Now the pressure to bring in additional revenue from audits could potentially increase.
So, what should be considered when changing residency from one state to another? A good first step may include changing voter registrations, vehicle registrations or drivers’ licenses (auditors will assert tax liability if those steps are not taken).
What makes one a resident for state tax purposes varies from state to state; generally, there are two bases to find someone subject to tax as a resident. The first test is domicile. New York defines domicile similarly to other states as “the place that an individual intends to be such individual's home—the place to which such individual intends to return whenever such individual may be absent." Others define domicile as the place that must take you in when other places won’t.
A person can have only one domicile even though they have many residences. A determination of domicile has as much to do with intent coupled with objective facts supporting that intent. Also, once domicile is established a change requires clear and convincing evidence of establishing a new domicile. Leaving one jurisdiction without establishing a real presence in the new one will not result in a change of domicile even if you dispose of your home and have no residence in the former state of domicile. Further, you may make a convincing case for a change in domicile, and still may owe tax as a “statutory resident” of a state. In New York, and many other states, a statutory resident is one who has a permanent place of abode and spends more than 183 days in the state.