When selling a business, choices about how to structure the sale can influence how the related income is sourced.
For this reason, understanding the sourcing rules that apply to income you would have after a domicile change is key to understanding the state tax impact of that change. In the eyes of the law, a domicile is different from a residence. You can have multiple residences in multiple states, but you can only have one domicile. Your domicile is where you intend to remain permanently — your true, fixed and principal residence. To establish your domicile, you must not only be physically present in that state but also have the intent to make that state your permanent home.
This also means you must be able to prove that this intent is accurate and honest. For example, if you have lived long-term in Minnesota and purchase a home in Florida, you cannot continue to spend the majority of your time at your Minnesota home and credibly claim that Florida is your new domicile. The courts would be able to correctly argue that your intent was not to make Florida your permanent home. Many people are able to become statutory residents of a state by living at least days a year in that state and having a place to live there year-round i.
However, proving the intent required to become domiciled in a state involves taking things a step further. Going back to our example of Florida residency versus Minnesota residency, are the clubs and religious institutions you and your spouse are members of located in Florida?
Are the home, cars, furniture and art you own in Florida bigger, nicer and newer than the ones you own in Minnesota? Are you still working for a business in Minnesota? Where does your family live? Establishing a domicile in another state means truly wanting to permanently make a fulfilling life there. But how can they miss Christmas with their grandchildren? You may be too invested in the community you grew up in and raised children in to leave. Also, consider the taxes that you will still owe.
On the other hand, non-resident states cannot tax you on intangible income such as dividends, interest, stock sales and retirement income. Instead, domicile merely ensures that state is a state of residence, but other states may claim the individual is a statutory resident as well, triggering another potential layer of income taxes in the second state potentially on top of the first. Furthermore, in a world where different states use different definitions of statutory residency, it becomes possible to have two different states both claim someone is a resident in their state under the statutory resident rules as well, if they use different shorter time periods to determine statutory residency status.
Notably, as discussed above, an individual is essentially a default resident of the state in which they have their domicile for tax purposes. And generally speaking, all of the worldwide income earned by an individual is taxable to the state in which they are a resident, regardless of where that income is actually earned or generated. For example, an individual who is domiciled in California is working temporarily in Iowa, owns rental property generating taxable income in Massachusetts, and is a limited partner in an investment in Florida.
All of the income from all of these sources will be subject to California state income tax, because California is the state of domicile…even if the individual spends not a single day in California during the entire year! That, in a nutshell, is the power of domicile. Without California being the state of domicile, without earning any income in California, and without spending any time in California, California would have not be entitled to a single dollar of income tax!
Iowa can tax the earnings generated in Iowa, and Massachusetts will be able to tax the rental income generated there. Even though all of that income is also subject to California state income tax. Fortunately, California, like most states, will provide a credit for taxes paid to other states for the lesser of the amount of tax paid, or the amount of tax that would normally be paid on that income in California.
Notably, while states offer a credit for taxes paid to other states, the end result is generally that where income is subject to tax in two or more states, the household ends up paying total state taxes at the higher of the two state income tax rates, one way or another.
Consider the following simplified example to illustrate this point:. Although there is a substantial amount of variability from state to state, many states provide real estate benefits to persons domiciled within their state.
These benefits can a number of different forms. For example, many states offer some sort of property tax break to individuals on their primary residence. Other states cap increases on property taxes to a limited percentage per year. Another common benefit states may provide to individuals domiciled within the state who are property owners is a Homestead Exemption. Still, though, individuals who are not domiciled in those states receive no creditor protection for their individually-owned real estate holdings.
Of all the steps that an individual can take to show intent of a change of domicile, time spent in a state is still one of the most, if not the most, important elements in the process though not solely determinative. Personal and business calendars can be helpful and may even be introduced as evidence if domicile is ever challenged , but such items are often given only modest weight since they are produced by the taxpayer themselves in the first place and can potentially be altered by the taxpayer to serve their own goals as well.
Generally, if an individual owns one residence and rents another, more weight will be given to the owned home. However, additional factors may also be considered, such as the way the residences are furnished.
Since you did not change employers, was this move by employer request and for what duration of time? In Oregon, a taxpayer is considered a resident if all of the following are true:. Whether a move out of California and into Oregon is permanent in character will depend to a large extent upon the facts and circumstances of each particular case. The underlying theory is that the state with which a person has the closest connection during the taxable year is the state of his residence.
Closely connected to the issue of whether a move is permanent or temporary in nature, is the question of 'domicile. An individual can at any one time have but one domicile. If an individual has acquired a domicile at one place i. California , he retains that domicile until he acquires another elsewhere. If the facts and circumstances for this taxpayer indicate Oregon residency, you may need to prove your non-residency to California. This is due to the connections you still maintain in California.
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