Why State Residency Matters for Your Taxes

Spending time out of state could have tax implications. Establishing your domicile can help you avoid paying extra.

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Considering a move to another state or already spending time in more than one state? You may wish to follow a job opportunity or be closer to family — or perhaps you want to retire in a state with lower taxes.

Whatever the reason, having more than one “home” is possible. But understanding state residency rules and the potential tax implications can help ensure that your living situation doesn’t result in unintended and expensive consequences.

Which state do you owe taxes to?

Although each state handles taxes differently, you will generally be considered a resident for state income tax purposes when your “domicile” is within that state and you spend more than half of the year living there.

What does 'domicile' mean?

For income tax purposes, the term “domicile” means that a resident considers a state to be their permanent place of legal residency, “true home” or the place they return to after being away.

An individual can have only one domicile at a time. However, depending on if you keep a home within a state and the amount of time spent within that state, you can also be considered a “statutory resident” of another state and be required to pay income taxes there as well as in your domicile state.

183-day rule

Your physical presence in a state plays an important role in determining your residency status. Usually, spending over half a year, or more than 183 days, in a particular state will render you a statutory resident and could make you liable for taxes in that state.

How to establish domicile

After you’ve moved to a new state, establishing your domicile is important to avoid your former state coming after you with a tax bill. It's not uncommon for states to conduct residency audits, and the onus would be on you to provide evidence to support a change in domicile.

That evidence can include:

  • Record of time spent within each state, preferably with more time spent in your new domicile state (because of the 183-day rule).

  • Employment location and status (permanent or temporary).

  • Change of mailing address to new domicile state.

  • Transfer of driver’s license and vehicle registration to new domicile state.

  • Updated voter registration to new domicile state.

  • Purchase or lease of new residence in new domicile state, and sale or lease of residence in former state.

  • Movement of what is “near and dear” to you to your new domicile state (family, pets, safety deposit boxes).

  • Establishment of bank and brokerage accounts in new domicile state.

  • Location of school for your children.

  • Board service for a business or charity in new domicile state.

  • Memberships to social organizations or clubs in new domicile state.

In cases where domicile and residency status may be disputed, an important deciding factor can be the intent behind your move. Items on this list may provide support that the intention of your move was permanent instead of temporary.

When dual residency might apply

There are circumstances in which you might be considered a dual resident and get hit with both states’ taxes:

  • If you move to another state but fail to establish domicile there.

  • If you have homes in both states.

  • If you lived in one state, move to another and then return to the original state.

  • If you are living in one state while working in another.

  • If you have relocated to another state on a temporary basis.

If you are considered a resident of a state, typically you will owe taxes to that state on all of your income, regardless of whether it was earned within the state or elsewhere.

When you move from one state to another, you may need to file as a part-year resident in your new state as well as in your former state.

You can also be considered a nonresident of a state and still owe taxes, with the difference being that a nonresident owes taxes only on the portion of income earned or sourced within that state.

How to handle your state tax liability

As with many financial decisions, determining your state residency tax filing status and tax liability can be complicated. A tax professional can help you examine your specific situation and guide you on how to best handle, and minimize, your taxes for the current year and in the future.

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