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Residency V. Domicile and The Complexities of Determining “Home”

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By Ciccarelli Advisory Services

The terms “residency” and “domicile” are terms that are often used interchangeably in our routine vernacular, but they have distinct differences when establishing legal obligations and domestic rights. It may seem a simple task to determine where one’s home lies. Home, after all, is where the heart is. However, state regulatory bodies and differing legal jurisdictions often make the issue more complex. It may be helpful for homeowners who own multiple properties across state lines to understand how your “home” status is determined to hopefully prevent any mishaps come tax season.

In general, a residence is a place you expect to inhabit for a fixed period, whereas a domicile is a home you plan to live in for an indefinite period. Income tax regulations make it clear that a person can have multiple residences, but only one domicile. Even if you have homes in two different states and split your time evenly between both, you can still only claim one as your domicile. The decision of which state fills that role may be more complicated than just determining where the most time is spent.

Take for example this scenario: you spend many years in Virginia, you work there, raise a family, and own a home there. You then buy a home in Florida, where you begin to spend more than half the year. You vote there, have mail delivered, register your car, and change your license. However, you continue to maintain ties to Virginia, conducting business and drafting up legal documents in the state. Now comes the question of which residence is your domicile? Since you have created ties to Florida and spend more time there, you may feel that Florida is your domicile. You may even file a declaration of domicile (a document declaring your intent to remain in that state permanently), but it may take more than this to prove to Virginia that you have made Florida your domicile.

In the 2012 court case, Cain v. Hamer, the Illinois Department of Revenue sent the Cains a notice of tax deficiency for unpaid state income taxes a few years after they established Florida as their domicile. They had been Illinois residents from 1964-1995, but in 1990 they built a second home in Florida. By 1996 they were splitting time evenly between both homes but took steps to establish permanent residency in Florida. The court used the domicile test to determine which state was they had a domicile in. This test was based on four factors:

  1. Physical abandonment of the first domicile
  2. An intent not to return to the first domicile
  3. Physical presence in the new domicile
  4. An intent to make that one’s domicile

The court investigated everything from credit card statements, telephone records, club memberships, political affiliations, and even planned burial arrangements to determine the couples domicile. In the end, the court decided that since the couple had taken steps to establish a permanent home in Florida (obtaining Florida driver’s licenses, voting in the state, developing relationships with Florida medical professional, and purchasing burial plots there) they were domiciled in Florida, and held a residency in Illinois. The case was a close call though, and factors such as continued business relations and charitable contributions with Illinois based organizations nearly turned tides the other way.

Since this case, higher-tax states have tightened up regulations and added stricter authentication processes to determine the resident’s true domicile. Since the recent $10,000 cap the Federal Government has placed on deductions of state and local taxes, many wealthier individuals are making the move to domicile in low to no income tax states. Tax officials in California and New York have begun performing residency audits on high-earning individuals with multiple residences who change their domicile.

Florida is a highly appealing move due to its lack of state income tax, estate tax, and inheritance tax. In 2018, more than 63,000 New York residents transplanted to Florida. In select cases, millionaires in California and New York have been able to save more than $1 million in taxes each year by relocating to Florida. Many residents who live part-time in both the Sunshine and Empire State, but wish to change their domicile to Florida, have had to demonstrate quite extensively that they have cut ties with their former home. Tax officials have looked into even the most unassuming of details to ascertain the true extent of one’s residency. In one case a man nearly lost his audit case due to the purchase of a New York in-state fishing license after claiming domicile for his Florida residence.  

Depending on the regulations and guidelines in each state, you may need to be prepared to substantially sever ties with your original domicile. This could mean keeping detailed records of where you are spending your time, where your valuable possessions are kept, professional and charitable affiliations, club memberships, voting and mailing records, and financial accounts. If you are planning on changing your domicile or considering changing it in the future, you may want to discuss the decision with your advisor to determine if any adjustments need to be made to your financial plan.

If you are interested in learning more about residency and domicile, we will be discussing the topic at our upcoming 2020 Wealth Symposium. CLICK HERE for more details!

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

Sources:

https://www.cnbc.com/2019/06/14/five-reasons-why-your-high-tax-state-wont-let-you-move-out.html
https://www.bloomberg.com/news/features/2019-03-04/rich-people-find-it-hard-to-flee-states-targeted-by-salt-limits
https://southfloridareporter.com/more-new-yorkers-moving-to-florida-to-save-on-taxes/
https://courts.illinois.gov/opinions/AppellateCourt/2012/1stDistrict/1112833.pdf
https://www.governing.com/topics/finance/High-Tax-States-Make-It-Hard-for-the-Rich-to-Leave.html
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