Now that the new federal tax reform laws have been enacted, high-tax states are scrambling to find ways to combat the newly-imposed cap on state and local tax deductions for their residents. States like New York and New Jersey are exploring a variety of options, including making charitable contributions to state-related organizations or even suing the federal government under the premise that the federal tax reform violates the Constitution. Some New Jersey business owners, including restaurant owners, have explored another option: leaving.
While selling your home and moving to South Dakota (or Alaska, Florida, Nevada, Texas, Washington, or Wyoming, where there is also no personal income tax) may seem like a straightforward way to alleviate the possible additional tax burden created by the federal tax reform, it also introduces the tiny problem of uprooting your life – and trying to find a good slice of pizza.
Simply moving out of state may not be enough to significantly reduce your tax bill, given that your income sources also come into play here. Income earned in New Jersey, such as income that flows through a restaurant business to its owners, should remain sourced to New Jersey, and income sourced to New Jersey is generally taxed by the State, regardless of the residency of the owner.
Before you consider changing residency for tax savings, it’s important to first understand what it actually means to be a New York / New Jersey resident for personal income tax purposes. To do this, take a look at how these states determine tax residency status. Individuals are classified as residents when they are either:
― “Domiciled” in the State; or
― Not domiciled in the State, but maintain a permanent place of abode in the State, and spend more than 183 days there during the year. A person in this position is commonly referred to as a “statutory resident."
The terms “domicile” and “residence” are often used synonymously. However, for income tax purposes, the two terms have distinctly different meanings.
Residence means living in a particular locality. Domicile means living in that locality, but with the intent to make it your fixed and permanent home. “Fixed and permanent home” means the place to which you intend to return after a period of absence, such as a vacation overseas or a business trip. For state tax purposes, a person may have more than one place of residence, but can have only one domicile.
Once established, a person’s domicile continues until he or she moves to a new location with the intent to both establish a permanent home there and abandon the old one. Simply moving to a new location, even for a long period of time, will not change a person’s domicile if the State determines that there is an intent to return. The tricky part is that there is no single indicator of intent when it comes to determining domicile.
Some of the key factors that are considered in the analysis of domicile are the comparative size and value of homes, active business involvement, family ties, location of sentimental items, where you register to vote, where your vehicles are registered, and where you maintain your driver's license. The key is creating a fact pattern that supports the assertion that you’ve left your old permanent home in the State and established a new one at your current location.
Even if you’ve already moved your prized ’67 Firebird to Texas, sent the kids off to college in New Zealand, started work at a tech start-up in Zanzibar, and burned your driver’s license, the State may still consider you a resident for income tax purposes. If a taxpayer maintains a permanent place of abode in the State and spends more than 183 days there during the calendar year, he or she is considered to be statutory residents, regardless of domicile.
When considering statutory residency, in-state presence for any part of a day will generally constitute a day spent in the State. Therefore, maintaining detailed documentation of your whereabouts can be critical. Records such as travel receipts, E-Z Pass statements, credit card charges, and phone call records can all be used to establish where you’ve been on a given day.
As you can see, changing your residency for state tax purposes is not a simple process. It requires a real life-change and a willingness to consume potentially sub-par pizza. (Do they even have pizza in South Dakota?) With careful planning, however, it is possible for a non-resident of New York or New Jersey to maintain a home and presence in the State, while alleviating his or her tax burden on income earned elsewhere.