Where is your Residency?

You: I own homes in more than one state.
CPA: You have residency issues.
You: Can this be cured?
CPA: Possibly, but you must follow my prescription exactly as stated.

States are constantly looking for ways to increase their revenue. One method they employ is finding people living in the state who claim to be non-residents and reclassify them as residents. High tax states (CA, MN, NY, NJ) have the most to gain from this maneuver. California and New York are the well-known for examining taxpayer’s residency status. How can you avoid state income tax residency problems?

First a primer on state taxation. All states have different income tax laws. This can lead to complexity and double taxation. In general, resident states tax you on all your income. Non-resident states tax you on the income you earn within their state. So, income earned in your non-resident state can be double taxed. (Worst case scenario is that two states consider you a resident.) You may get a credit for some or all the taxes you pay to your non-resident state. To minimize your state tax obligations, you want your resident state to be the state with the lower (or no) income taxes. How can you accomplish this goal?

Establish a “domicile” in your lower tax state:

  • Earn income
  • Vote
  • Go to church
  • Have club memberships
  • Establish your permanent postal address
  • Get your driver’s license
  • Register your vehicle
  • Claim a homestead exemption
  • Visit doctors
  • Open bank accounts

If you don’t have a heavy preponderance of these items in your lower taxed state, it may come down to the days spent in each state. The magic number is 183 days. But documentation is crucial.

Good luck with establishing, maintaining and documenting your residency in a low (no) tax state!

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