2020 has provided many unexpected changes. When COVID-19 started, many Americans left their city residences and relocated to what they previously considered their second homes. By April, these individuals had offices set up in homes typically used for beach weekends, ski trips and quiet getaways from city life.
Due to the amount of time spent at these new locations, as well as plans to stay for the foreseeable future, many people are asking if this is the time to consider changing their domicile for tax purposes. However, few realize that this is not as easy as a statement claiming you have changed your intention. When a taxpayer decides to change their domicile, they need to prove their intention to leave the old domicile and to establish a new one. This is especially true when a taxpayer does not sell the old home.
Domicile is defined as the place you consider your permanent home and where you have a substantial connection. Your domicile is the place you will always return to no matter where your travels take you. Determining a person’s domicile is important since it enables state governments to tax individuals on their worldwide income.
Therefore, domiciles rarely change from one year to the next. Some might be considering changing their domicile for 2020 and then returning to the old domicile in 2021. It’s unlikely that you can convince the old state that in 2020, you never intended to return to your original domicile, especially since the auditor looking at your situation will have the benefit of hindsight. Audits of tax year 2020 will not occur for at least another two years. This is plenty of time for states to look back and examine the facts and circumstances to determine if taxpayers actually changed their lifestyle to the new location.
Over the past few months, dozens of clients have sought out more information on this process as their employers have provided more flexibility. The test for establishing a new domicile will be based on a number of factors–none of which should hold more weight than the others since the entire fact pattern is looked at holistically.
Time Spent in Each Location
The government assumes taxpayers spend a majority of the year at their primary home. Therefore, your intention to change domicile must be accompanied by more time spent in your new place of domicile than any other location. This can sometimes be difficult, especially when a taxpayer has multiple homes.
If a taxpayer has multiple homes, a comparison of the new home versus the old home will be done to make sure that they are comparable to the taxpayer’s lifestyle.
The amount and type of business connections to the old domicile will raise concerns. For example, although managing a business located in the city from a different location is absolutely possible–as technology and the effectiveness of remote work has a proven–some states, like New York, will see this as a strong connection.
Your connections to the primary and secondary homes are also looked at closely. For example, if you have minor children, the location of their school registration could be a strong factor since most underage children follow their parents’ domicile. Children’s enrollment in clubs and sports in the area are also evaluated for connections.
Lastly, other lifestyle factors will be examined. Such things as club memberships where you may switch to resident rates, professional appointments with local physical trainers, dentists and psychiatrists, and even the location of veterinary services may be looked at to indicate the place where the taxpayer has a closer connection for domicile purposes.
While it may have been an easy decision to change residences during COVID-19, choosing whether to change your domicile requires thoughtful consideration. Remember, planning around a change of domicile should be done as soon as your intention has been established. The need to establish a pattern of change will help you prove your case most likely when, and not if, you are audited for a change of domicile.
We expect that high net worth taxpayers who retain ties to the state will most likely experience audits in the future due to the coincidence of timing to the pandemic, so make sure to speak with your tax professional to evaluate whether or not changing your domicile is a good decision for you.
Donna Cuiffo, CPA, is the Senior Managing Director at Clarfeld Citizens Private Wealth.
Important Disclosure: Clarfeld|Citizens Private Wealth, an affiliate Of Citizens Bank NA strongly recommends, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Clarfeld. Clarfeld is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.