Another State Residency Case

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).

Indiana and California drop their “reverse Credit” arrangement starting with the 2017 tax year

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).

State Taxes for Strike Travelers Might Get Easier

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 🙂

CRA Requiring Transcripts of US Returns for Foreign Tax Credit

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

New Rules on IRA Rollovers that Fail the 60 Day Rule

The IRS is simplifying the procedure for getting a waiver of the 60 day rollover rule in cases where there was a problem with the process or an unexpected event. Often when rolling over amounts into another IRA, a taxpayer will receive a check which then must be sent to the new investment firm. Sometimes that process breaks down due to mail delays, unexpected events or other reasons. The new procedure is linked below

New rules for 60 day rollover limit