Since we specialize in multi-state client situations, it is no surprise that we are a bit anal about residency issues. On the heels of the UT case we posted recently comes one from Arkansas that was ruled for the taxpayers despite the lingering legal ties to Arkansas.
The case involves a couple that moved from Arkansas (a state with an income tax) to Texas (a state without an income tax) in the later part of 2012. Within one year they returned to Arkansas due to pregnancy related complications requiring family support which they did not have in Texas.
Arkansas Department of Revenue ruled that the couple never really abandoned their Arkansas domicile for the following reasons:
- Kept Arkansas drivers licenses and even had one reprinted
- Maintained homestead exemption on Arkansas property
- Continued car registration and Voter registrations in Arkansas
As the case reads, the couple did not make a lot of effort to sever their Arkansas ties but the court took notice that
- The husband took a permanent position with greater responsibility in Texas
- Enrolled their Children in School
- Were reimbursed by their employer for the move to Texas
- Commenced their pregnancy related treatments in Texas
Generally, state revenue agencies will not relinquish the right of taxation on those who do not properly sever their ties to the old state AND establish ties in the new state. Even if that is done, an absence of only a year similar to the taxpayers case will not be sufficient to claim non-residency. Its rare cases like this that the courts will intervene
We are posting the case for its instructive discussion. The case outlines many of the factors that Arkansas used to determine the domicile of the taxpayers. None of which are unusual compared to other states.
When one moves to another state, care must be taken to sever ties to the old state to avoid the risk that the old state will assess tax as if the taxpayer never left
Starting January 1, 2017 the new standard mileage rates are as follows
53.5 cents per mile for business miles driven, down from 54 cents
17 cents per mile driven for medical or moving purposes, down from 19 cents
14 cents per mile driven in service of charitable organizations
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).
When one works in more than one state, both the home state and the work state will tax the income. The home state will then credit the taxpayer for the taxes paid to the work state on that income to avoid double tax on the same income.
Some border states have a reciprocity agreement where income earned in the border state is considered income earned in the home state so that only the home state will tax that income
For residents of AZ, CA, OR, IN and VA, when one lives in one of the listed states and works in the other, the credit goes in “reverse” . For example when a VA resident works in CA, the credit to relieve double taxation is allowed by CA, not the home state VA. IN and CA have dropped their reverse credit arrangement as of the 2017 tax year. For tax years 2017 and later, IN will allow a credit for taxes paid to CA against IN state tax obligations on the same income. (Note: IN and VA do not share this arrangement).
On September 21, 2016, the U.S. House passed the Mobile Workforce State Income Tax Simplification Act of 2015, which would limit states’ authority to impose personal income taxes on nonresident employees for work performed in other states. If enacted, the bill would preclude an employee’s income earned in more than one state from being taxed in any state other than the employee’s state of residence and the state where the employee is present and performing employment duties for more than 30 days in the calendar year. The bill would also exempt employers from withholding and information reporting requirements for employees not subject to income tax under this law. The bill would allow employers to rely on the employee’s annual determination of the time expected to be spent working in a state, absent fraud or collusion.
The definition of “employee” would not include professional athletes and entertainers and prominent public figures performing for wages or other remuneration on a per-event basis.
The bill text is available at https://www.congress.gov/bill/114th-congress/house-bill/2315/text.
My comment: For most travelers this does not change the game, however those working strikes might be affected. If it passes the Senate and is signed into law I could see states like CA and NY take it to court.
One tidbit: Senator Lieberman of Connecticut introduced this bill a long time ago and it never got any traction. The purpose of the bill then was to contain border state NY from taking tax revenue from CT 🙂
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CRA has decided that all claims for foreign tax credits should come as official notices vs copies of tax returns from other countries. Effective immediately, clients will require an official Notice of Assessment from a foreign country to claim FTC. For US credits, a copy of the 1040, state return and W2s was was. One problem – the IRS and state tax agencies do not issue Notices of Assessments and some transcripts are not available till the summer. We will see how this plays out. CRA is allowing proof of payment or receipt of refund along with a copy of the return