Domicile: Your State of Affairs
Where do you live? It depends.
Domicile is “the place where a man has his true, fixed and permanent home and principal establishment, to which whenever he is absent he has the intention of returning”. A person can have only one domicile, no matter how many residences he owns.
Your state of domicile determines (1) to which state you pay state income taxes, (2) where your will is probated and where your estate will be administered (3) to which state your estate pays inheritance and estate taxes and (4) which state’s laws govern the enforcement of judicial orders.
The state of domicile also determines spousal rights in property. Most of the states, like Pennsylvania, are common law states. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states. A move to any of these states requires special planning.
It is very possible for more than one state to claim that you are a domiciliary. When this happens all of the states that have claims can assess income tax and inheritance or estate tax. Some states are parties to agreements to resolve these issues as they affect death taxes, but many are not. The battle over Howard Hughes’ estate went on for years, with Texas, Nevada and California all claiming him as a domiciliary. In perhaps the most famous estate tax domicile case, the estate of Mr. Dorrance, the founder of Campbell’s Soup Company, was taxed by both Pennsylvania and New Jersey, in each case as if he was domiciled there. Each of Pennsylvania and New Jersey collected about $17 million. The U.S. Supreme Court upheld this result.
Since domicile depends on where you intend to return, it is a subjective concept. Nevertheless, many objective actions can give indications of your intention. There are lists available for actions that should be taken to give evidence of your intention to change your domicile. You don’t have to do everything on the list. None of these things, except the requirement for physical presence in the new domicile, are absolute requirements. However, you have to do enough of them, especially the more significant ones, to convince the tax authorities that you have truly moved your domicile. Here are some actions that show intention to change domicile:
• Buy or lease property in the new domicile state, furnish it as a permanent residence, not a vacation place.
• Spend more than 183 days per year in the new state – this is the most important requirement. In some states this is an ironclad rule for tax purposes. For example, if you maintain a residence in New York and spend more than 183 days per year there, New York considers you a resident for tax purposes regardless of your intentions.
• Obtain a driver’s license in the new state.
• Register your cars in the new state.
• Register to vote in the new state, and vote.
• Go to doctors, dentists, lawyers and other professionals in the new state and have your records moved from the old state to professionals in the new state.
• File your federal income tax return with the appropriate IRS service center and show your new state as your address.
• File a Declaration of Domicile if your new state has such a procedure.
• Move bank accounts and safe deposit boxes to the new state.
• Send notifications of a change of address to family, friends, business associates, professional organizations, credit card companies, brokers, and insurance companies
• Use the new state as a home base. When you travel, leave from and return to the new state.
• Keep your family heirlooms, furniture and keepsakes in the new state.
• Change legal documents to reflect residency in the new state.
• Update your estate plan and have your estate planning documents identify you as a resident of the new state.
• Join organizations such as clubs, religious groups and become active with local charities in the new state.
• Apply for a homestead in the new state if applicable.
Not only must you adopt a new domicile, but your old domicile must be abandoned. In your former state of domicile:
• Have your name removed from the voter registration list.
• Turn in your driver’s license.
• Pay income tax as a non-resident if applicable.
• Mark your last state income tax return “FINAL” and use the new state’s address.
• Spend as little time in the old state as possible.
• Close accounts in the old state.
• Change all club membership, religious and social affiliations to “non-resident” status.
Timing of the change in domicile can be important. If you sell your business or your home in the old state, where you are domiciled at the time of the sale can impact how the gains are taxed. If you are creating trusts, the “resident state” of the trust will often depend on your domicile at the time you create the trust. This means a trust could remain taxable in the old state even though you move your domicile to the new state.
If you stop filing taxes in your old state, this doesn’t mean that they have no claim on you. Remember that if you don’t file a return for a year, the statute of limitations never starts running. There is no limit to the number of years they can go back and assess tax. Consider filing a non-resident return.
Be consistent. If you want to be a Floridian to escape Pennsylvania income tax, don’t register your car in Pennsylvania to get lower insurance rates. Use common sense. Does your neighbor who has lived in Florida all her life have her car registered in Pennsylvania? Of course not. Does she belong to a church or synagogue in Pennsylvania? No. Just imagine yourself explaining that to a tax auditor.