MULTI-STATE RESIDENCY

What You Need to Know

To Avoid an Unexpected State Tax Liability

Today, taxpayers may have multiple residencies for a host of reasons. An example could be a “snowbird” . . . a PA resident who lives in FL during the winter months to soothe those aching bones during the chilly winter months. This person is a resident of both PA and FL. Another example could be where the PA resident decides that for state tax-savings reasons that they want to show their primary residency as being in FL which does not have a personal income tax versus PA which has a 3.07% personal income tax rate.

We recently met a taxpayer who maintained their PA home but decided to call their FL winter home their primary residence to save state income taxes. The PA Department of Revenue (DOR) assessed the taxpayer’s income earned as if he had resided in PA, despite the fact that he relocated to FL, had a FL driver’s license, voted in FL and attended church and social groups in both PA and FL. He had unsuccessfully attempted to persuade PA that he was not subject to PA’s personal income tax, but his arguments fell on death ears. This is when he requested a consultation with us.

The important factor is that while a taxpayer can have multiple residences (as described above), a taxpayer can only have one domicile at any given time. The tax concept of domicile can be complex, particularly when you have a taxpayer who spends time in, and receives income from, multiple states. Most states define domicile as “the place where the taxpayer has his true, fixed, permanent home.” Some persons refer to domicile as a permanent residence. PA will continue to tax its “former residents” until such time that the taxpayer (1) demonstrates he has abandoned his PA domicile; (2) can demonstrate that a new domicile has been established in another state; and (3) has an actual physical presence and actual bode in the new location.

Let’s look at the various tests states use to determine domicile. Five primary factors are (1) where your home is located, (2) your active business involvement, (3) time spent in the state, (4) items that are near and dear to you, and (5) family connections. In the case of our client, both states could claim that he was domiciled in their state based on his circumstances. He had a home in both states, spent considerable time in both states, went to church and was actively engaged in professional associations in both states, and had family in both states. In such cases, states look at secondary factors which include declaration of domicile, mailing address, safe deposit box, voting, and car registration. The problem with the secondary factors is that while helpful, they are often not necessarily persuasive.

Many states have a “day test” where residency is determined by the number of days a person spends in a given state during a calendar year. New York aggressively and successfully has taken the position that any person who has a dwelling in NY and resides in NY for more than 183 days is a resident of NY subject to its income tax. This day test varies by state and complicating matters is that what determines a “day” can vary from any portion of a day to as much as 270 days, and some states count travel days as days of residence. Thus, keeping track of the number of days spent in a given tax jurisdiction is critical. During an audit, journals, personal calendars, travel receipts, etc. will be examined. If the taxpayer cannot verify where the day was spent, the tax jurisdiction includes it as a day of residency in its state. In an interesting case, Gregory Blatt (CEO of Match Group) was able to convince the court that his residence was in Dallas, TX and not in the Hamptons, NY because his dog resided in Dallas. The NY court found that since the dog was a “near and dear item,” his residence was in Dallas.

Since FL is often the state where PA retirees purchase a second home, let’s discuss what needs to be done to prove a FL domicile to the PA DOR. The first test is easy and it is that the taxpayer must establish a physical presence in FL which could be demonstrated by purchasing a home or renting a residence in FL. The second test is subjective, and it involves the taxpayer’s intent. The burden of proof is on the taxpayer declaring a FL domicile to show that FL is the center of the person’s social, economic and civic activity.

In some cases, it is far more important that the taxpayer be able to demonstrate the steps that were taken to divorce oneself from PA, rather than the steps to become a resident of FL. Accordingly, we recommended to this client that he:

File a Declaration of Domicile with the Clerk of Court in the FL county where he resided;
Obtain a FL drivers license, FL vehicle registration, and FL voting card;
File for a homestead exemption in the FL county where he resided;
Transfer securities, bank accounts, brokerage accounts and similar investments to institutions located in FL;
If he was maintaining a safe deposit box in PA to transfer its contents to a safe deposit box in FL;
Change affiliations with religious and social organizations to FL and request non-resident status with organizations maintained in PA (the former state);
Transfer family possessions, heirlooms and collections to his FL residence since courts assume that such items would be kept at a permanent residence;
File your federal income tax return showing a FL mailing address and file a final tax return with PA showing FL as the mailing address;
Notify the IRS by certified mail of the FL mailing address;
Change address on credit cards & charge accounts to the FL address;
File a FL Intangible Personal Property Tax Return (imposed on FL residents) by the due date of June 30^th;
Establish relationships with FL doctors and insurance agents;
Make sure that you spend more than 183 days away from your PA residence and document via a journal or travel log with receipts to substantiate your days outside of PA; and
Direct that all interest, dividend, K-1 statements, etc. be mailed to your FL address

While the above list may be extensive, it is important to note that the PA DOR (or any state) and the courts look at the preponderance of evidence. And one last suggestion . . . Be sure your dog is domiciled in FL and you have those FL vet bills.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

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About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.