A recent UT tax case provides another example of how states determine residency and is of special interest to our clients who earn foreign income.
The case involves an individual that worked in a foreign country during 2012 and 2013 but still kept a drivers license, car registration and his spouse/kids in UT. The case is instructive as it outlines the items that are evidence of continuing domicile. Below is an excerpt from the UT tax code. Notice the reference to a drivers license (i), vehicle registration (vi), and address on tax return (ix) as proof of residency for tax purposes.
As we always advise clients, be sure that when MOVING away from a state to not only “depart” but “arrive” as well. In other words, sever the old residential ties and establish new ones. Don’t let the old drivers license and car registration linger in active status.
(Utah State Tax Commission, UT—Commission Decision, Appeal No. 15-1332,Utah,(Jun. 27, 2016)
(b) The determination of whether an individual is considered to have domicile in this state under Subsection (3)(a) shall be based on the preponderance of the evidence, taking into consideration the totality of the following facts and circumstances:
(i) whether the individual or the individual’s spouse has a driver license in this state;
(ii) whether a dependent with respect to whom the individual or the individual’s spouse claims a personal exemption on the individual’s or individual’s spouse’s federal individual income tax return is a resident student in accordance with Section 53B-8-102 who is enrolled in an institution of higher education described in Section 53B-2-101 in this state;
(iii) the nature and quality of the living accommodations that the individual or the individual’s spouse has in this state as compared to another state;
(iv) the presence in this state of a spouse or dependent with respect to whom the individual or the individual’s spouse claims a personal exemption on the individual’s or individual’s spouse’s federal individual income tax return;
(v) the physical location in which earned income as defined in Section 32(c)(2), Internal Revenue Code, is earned by the individual or the individual’s spouse;
(vi) the state of registration of a vehicle as defined in Section 59-12-102 owned or leased by the individual or the individual’s spouse;
(vii) whether the individual or the individual’s spouse is a member of a church, a club, or another similar organization in this state;
(viii) whether the individual or the individual’s spouse lists an address in this state on mail, a telephone listing, a listing in an official government publication, other correspondence, or another similar item;
(ix) whether the individual or the individual’s spouse lists an address in this state on a state or federal tax return;
(x) whether the individual or the individual’s spouse asserts residency in this state on a document, other than an individual income tax return filed under this chapter, filed with or provided to a court or other governmental entity;
(xi) the failure of an individual or the individual’s spouse to obtain a permit or license normally required of a resident of the state for which the individual or the individual’s spouse asserts to have domicile; or
(xii) whether the individual is an individual described in Subsection (1)(b).
While dealing with federal taxes is hard enough, anyone who works in more than one state has a greater challenge juggling all the different state tax returns.
How are taxes computed when you work in more than one state? Well on paper, it’s pretty simple, however, it is a great source of confusion for most.
The rules run like this : your home state will tax your global income regardless of where you earned it and regardless of whether you earned any income in your home state. It doesn’t even matter if you were gone for an entire year and never set foot in your home state- the fact that you maintain a legal domicile in your home state is sufficient basis for that state to tax your global income .
At the same time, when you work in another state and labor on its soil, that state has the right to tax all of your income earned within its borders.
Now. Are you being taxed twice on the same income? Yes. But, there is relief. Your home state is obligated to give you a credit for the tax that you pay to the work state on the same income . Many states will call this, “credit for taxes paid to other states”.
To illustrate: say you live in a state that has a 5% tax . You work a temporary assignment in a state that has a 2% tax. Since the tax you pay to the work state is less than the tax you would pay to your home state on the same income, you will have to make up the 3% difference.
Let’s look at this illustration in reverse : say you live in a state with a 2% tax and work temporarily in a state that has a 5% tax. Since you pay more to the work state than you would in the home state, there is nothing due to the home state, since the credit brings the tax liability for that income to zero.
I will explore other nuances of multistate taxation in later posts.