Recently, The New York Times published an article entitled When Sheltering in Place Puts Your Tax Strategy at Risk (May 15, 2020). The article was timely, relevant, and important to many people who were considering changing their state/city tax situation pre-COVID or, because of COVID, are now questioning their current living situation and the amount of state and city taxes they pay.
The article bounced around between important state concepts such as domicile, statutory residency, and state-sourced income for a nonresident. Without having a good understanding of each concept, or being advised by a tax professional that specializes in this area, readers could easily come away from reading the article not truly understanding what it takes to change one’s residency for state tax purposes.
The terms “domicile” and “residence” are often used synonymously. However, for state tax purposes, the two terms have distinctly different meanings.
The term “domicile” equates to the location of one’s true home. Thus, a taxpayer can only have one domicile at a time. Once an individual establishes a domicile, that location will remain his/her domicile until the person can show with “clear and convincing evidence” he/she intended to both give up their old domicile and establish a new domicile. It is important to note that “giving up one’s old domicile” does NOT require the sale of the person’s home in the old domicile state.
When determining whether a change of domicile has occurred, states typically look to a person’s intent. Many state tax departments and courts look to five factors when determining a person’s "intent" to change domicile. These factors include:
Home - The size, value, and use of the old domicile home as compared with the nature and use patterns of the new domicile residence.
Active Business Involvement – The location of a taxpayer’s continued employment or active participation in a business whether in the new or old domicile.
Time - The location where an individual spends the majority of his/her time.
Items “Near and Dear” - The location of items which have significant sentimental and/or monetary value to the person.
Family Connections - The location of family members.
There are many simple things a taxpayer can do to document their intention to change his/her domicile, such as:
A typical “change of domicile” checklist has about 20-25 items on it. Given the checklist items are typically easy to accomplish, these actions are not viewed as being as significant as the five factors when evaluating a domicile change. Having said that, not doing the checklist items can make a challenge by the state of old domicile much harder to defend.
Most states consider an individual who is domiciled in another state to be a “statutory resident” for income tax purposes (which means subject to tax on one’s worldwide income as if domiciled in the state) if the individual:
Two additional considerations taxpayers need to understand with respect to statutory residency are:
A person who is neither a domiciliary nor a statutory resident is classified as a nonresident. Nonresidents are only subject to tax on income earned in the state. Examples of income “earned” in a nonresident state can include (but not limited to):
Potential COVID-19 Domicile/Residency Considerations
The first step in evaluating a change in one’s domicile is to ascertain the location of the person’s current domicile. As previously noted, a person can only have one domicile at a time and once a domicile is established it remains as such until the individual can show with clear and convincing evidence that both their intent and actions indicate giving up the old domicile and establishing a new one.
The following examples show how the domicile rules may apply in our current COVID-19 environment.
In response to a “Stay-At-Home order,” Jane leaves her New York City apartment on March 1, 2020 and moves into her much larger vacation home in East Hampton, New York. Jane continues to work remotely for her New York City-based company. Jane does not intend to move back to her New York City apartment until a vaccine is introduced and the pandemic is under control. She wants to avoid paying New York City personal income tax on her 2020 income but is not willing to give up her apartment.
Joe, his spouse, and their children left their New York State home on March 1, 2020 due to COVID and moved into their Miami home. Their Miami home is similar in size to their home in New York. Joe wants to become a Florida domiciliary but also maintain his existing home in New York.
It is critical that before a taxpayer undertakes the process of changing domicile that he/she has a clear understanding of the domicile and statutory residency rules in the jurisdiction they currently reside in. In addition:
Finally, given the significant financial drain the COVID-19 pandemic has had on states and cities, it is expected these jurisdictions will put an increased effort into identifying taxpayers that claimed a change in residency during 2020 and 2021. Given this likelihood, the historical high standards a taxpayer faced in proving a change in domicile (i.e., “clear and convincing evidence”) most likely just got higher.
About the Authors
David Seiden is a partner and practice leader for Citrin Cooperman’s State and Local Tax Practice and can be reached at email@example.com or 212-225-9505. Eugene Ruvere, is a State and Local Tax Practice partner in Citrin Cooperman’s White Plains office and can be reached at firstname.lastname@example.org or 914-949-2990. Rena Genauer, is a State and Local Tax Practice manager, in Citrin Cooperman’s New York office and can be reached at email@example.com or 212-225-9551.