The title is a bit misleading and purposeful as this really doesn’t add to the body of knowledge for state tax residency rules. However, it reinforces the basis by which most states determine tax residency.
State tax residency is important as the state where an individual keeps their legal domicile is the state that has a right to tax global/worldwide income earned by the taxpayer. The more common term to describe this relationship is a Permanent Residence. This is different from the concept of a Tax Home that determines from where an individual has travel related expenses that are either deductible or that they can receive reimbursements for on tax-free basis. .
Many of our clients deal with Permanent Residence issues either because they are moving, staying too long in one state or the state wants to take an aggressive tone toward some relationship that the client has to a state.
In these 2 Indiana state tax cases, one positive for the taxpayer and the other negative, the same common benchmarks were used to determine whether the taxpayers had a domicile in Indiana. These benchmarks are common to most states:
1) Purchasing or renting residential property
2) Registering to vote
3) Seeking elective office
4) Filing a resident state income tax return or complying with the homestead laws of a state
5) Receiving public assistance
6) Titling and registering a motor vehicle (Drivers Licenses)
7) Preparing a new last will and testament which includes the state of domicile.
Item 6 is very important as you will see in the two cases that are linked below:
In the first case, entitled “negative”, the taxpayer was a physician that moved to Louisiana to take a permanent job, however, he continued to use his ex-spouses address in Indiana for license, registration and insurance purposes. Most states treat residency similar to a flight on an airplane-when you take off, the wheels no longer touch the ground and when you land the wheels touch the ground in the new location. When one moves and changes their domicile they are expected to sever all residential ties so that their affairs no longer touch the old state. Additionally they are expected to establish ties in the new state to replace the ones that were severed in the old state. You cannot just take off, you have to land as well. Similar to this case, the taxpayer took off but never landed as he continued to maintain his Indiana residential and legal ties.
In the second case that was decided for the taxpayer, a couple moved from Florida to Indiana, however the wife came first and the husband came a year later. Generally, most states expect spouses to move together which is most likely the reason that Indiana Department of Revenue expected the couple to file joint returns as residents Indiana in the wife’s first year of residence. However, in this case, the husband remained in Florida working at his full-time job and did not change his legal ties – his driver’s license and car registration, until he moved to Indiana. The wife was correctly judged to be a part year resident of Indiana in year one, and the husband a part year resident of Indiana beginning in year two.
One of the most common misconceptions among mobile professionals is that they are only taxed in whatever state they work. That is not the case. An individual is taxed on their worldwide income by the state in which they are domiciled-where they maintain their permanent residence. They are also taxed by the work state on income earned within their borders. However, to relieve the possibility of double taxation, the home state will generally credit the taxpayer for taxes paid to other states on the same income.
The final take away is simply the power of the state to impose tax on all income an individual earns if they continue to maintain their legal ties to that state. Simply taking another job in another state doesn’t change the equation. The ties to the old state must be severed and at the same time, ties to the new state must be established.