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Domicile v Residence: Establishing state residency for tax purposes

Domicile v Residence: Establishing state residency for tax purposes

In law, “domicile” is defined as the place of dwelling of an individual, as it applies to judicial jurisdictions and civic obligations and benefits. A resident, on the other hand, is defined as a person who comes to a place with the intent of establishing a domicil (this is, however, usually temporary).

A few common-law countries such as the likes of Australia and New Zealand have subjected the meaning of the term “domicile” to statutory reforms. However, we will attempt a clear explanation for tax purposes.

Domicile tax definition

According to taxation laws, your tax domicile is a place of primary residence. One may be a resident of many places at different times; however, the domicile is where that individual goes back to roost. They also enjoy tax benefits and are subject to tax obligations within that state. Your domicile will determine your home state for income tax purposes.

It is important to note that dual residency is permitted under state laws. Dual residency is a situation where an individual (or more often, a business) is present in more than one state/country at the same time. That individual/business fulfils tax obligations to their states/countries of dual residence.

How to establish state residency for tax purposes

The benefits of establishing residency in another state for tax purposes are endless. That single move could lower the amount you have to pay each year in state taxes.  If this is the case, then you may want to consider taking it a step further by establishing your new state of residence as your permanent domicile.

What constitutes state residency?

Although the rules are quite sketchy, most states define a state residency as a person who is present in that state for a long-term purpose. This could be determined by several factors such as how many months out of a year you’ve lived there if you are a registered voter there, your mailing address, and if your driver’s license was issued there.

Helpful tips for establishing state residency for tax purposes

If you wish to establish state residency in a new state for tax purposes, here are a few tips that should help:

  1. Change your mailing address to match that of the state where you wish to establish residency.
  2. Register your car and secure a driver’s license from the state.
  3. Become a registered voter within the state.
  4. Spend more time (with evidence) in the state that you wish to establish residency.
  5. Close your old bank accounts and open a new one within the state.
  6. File either a resident income tax return or a non-resident return in the new state.
  7. Do not file your tax returns in the old state.
  8. Buy or rent a house or apartment in the new state.
  9. Change your address on all documents that carry your address
  10. Speak to a Tax Consultant: Establishing residency in another state to enjoy more tax benefits is an innocent move laden with a lot of unforeseen consequences. You may come under the scrutinous gaze of state tax authorities, or even run the risk of getting claimed as a resident by multiple states – leading to multiple taxes and fees. A tax professional will help you identify and address domicile tax issues and avoid pitfalls.

About Souri, Gazda, & Co.

At Souri, Gazda, & Co, we address domicile tax issues and more. Our team of professional certified public accountants face and tackle tax issues head-on, giving you solutions like residency planning and audit assistance. Contact us now at 888-585-8629 or 617-430-4674 or send us an email at [email protected].

For more information, email [email protected]

Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.