Most states in the United States define “residency” based on a person’s “domicile.” Domicile, in general, is the place which an individual intends to be his or her permanent home and to which such individual intends to return whenever absent.
An individual can only have one domicile at a time. Once a person acquires a domicile, he/she retains that domicile until another is acquired. A change of domicile requires: 1) abandonment of a prior domicile, 2) physically moving to and residing in the new locality, and 3) intent to remain in the new locality permanently or indefinitely. If a person moves to a new location but intends to stay there only a limited time (no matter how long), their domicile does not change.
Domicile is not dependent on citizenship. However, a United States citizen shall not ordinarily be deemed to have changed domicile by going to a foreign country unless it is clearly shown that such individual intends to remain there permanently.
Factors to Determine Intent
As indicated above, the location of a person’s domicile is dependent on a person’s intentions. Intent is a state of mind. A state of mind is difficult to prove. As a result, taxing authorities (and courts) look to a person's actions to determine their intent. Some of the factors that courts and taxing authorities look to include:
- Amount of time you spend in one location versus another
- Location of your spouse and children;
- Location of your principal residence;
- Where your driver’s license was issued;
- Where your vehicles are registered;
- Where you maintain your professional licenses;
- Where you are registered to vote;
- Location of the banks where you maintain accounts;
- Location of your doctors, dentists, accountants, and attorneys;
- Location of the church, temple or mosque, professional associations, or social and country clubs of which you are a member;
- Location of your real property and investments;
- Permanence of your work assignments in a location; and
- Location of your social ties.
A classic situation where an individual has moved, but has not changed their domicile, is where an employee of a multinational corporation has been transferred to an overseas location for a specified period of time (e.g., 2 years, 5 years, etc.). By definition, the temporary nature of the assignment precludes a change of domicile. Even if the assignment is extended, say for another 5 years, there has been no change in domicile unless the individual intends to remain in the new locality permanently or indefinitely.
How the States Catch You
States do not typically track in detail the activities of each taxpayer. If a taxpayer leaves a state, has no further income sourced in that state, and ceases to file tax returns in that state, then the tax authorities of that state do not typically inquire where the taxpayer moved to or whether they changed their domicile. The domicile/residency issue usually arises in two different circumstances. In the first circumstance, the taxpayer continues to have income sourced from that state, but the taxpayer begins filing as a nonresident.
The second circumstance is when a person, who has been filing as a resident of the state, ceases all filings in that state, and then at some point in the future again files as a resident of the state. This second circumstance often applies to individuals that move overseas for a period of time and then return to the same state. When the state tax authorities receive a tax return, they check to see if that individual filed a tax return in prior years. If prior year resident tax returns have been filed, but there is a gap in filings (of perhaps several years), the state tax authorities begin to wonder why no tax returns were filed during the intervening years.
If the state tax authorities identify a person with a gap in tax filings, and they believe that that person retained their domicile in that state, then they will require the filing of state income tax returns for the intervening years. Statutes of limitations for tax returns generally begin to run on the date a tax return is filed. If no tax returns have been filed for the intervening years, then the statute of limitations for those years remains open indefinitely.
Substantial Taxes May be Due
States do not typically allow foreign taxes paid as credits against state income taxes. Further, states may or may not conform to the federal rules which allow certain foreign earned income to be excluded from taxable income. As a result, persons temporarily residing overseas will often owe significant state income taxes, even though they may not be present in the state at all during the year.
Some states provide exceptions to individuals being treated as residents, even if the individuals retain their domicile in that state. For instance, California allows (with certain exceptions) individuals that are domiciled in California to be treated as nonresidents of California if they are located outside California under an employment-related contract that lasts for at least 546 days.
Connecticut, on the other hand, has two alternative tests that allow Connecticut domiciled individuals to be treated as nonresidents. To meet the requirements of the first test, an individual must:
- not maintain a permanent place of abode in Connecticut for the entire year,
- maintain a permanent place of abode outside of Connecticut for the entire year, and
- not spend more than 30 days in Connecticut during the year.
To meet the requirements of the second test, an individual must:
- be in a foreign country for at least 450 days during any period of 548 consecutive days, and
- during this period, not spend more than 90 days in Connecticut (or have a spouse or minor children that spend more than 90 days in Connecticut).
As can be seen from the California and Connecticut rules, the state exceptions to residency for domiciled individuals are not consistent. Thus, it is important to review the rules for the state in which the person is domiciled.
Attorney Andrew Mitchel is an international tax attorney that advises individuals and businesses with cross-border activities.