A residence is a place you live at times. A domicile, on the other hand, is home-sweet-home. You can have multiple residences, but only one domicile.
It’s an important distinction especially when it comes to taxation. As more high net worth taxpayers are moving to low-tax states, state auditors have become increasingly aggressive at making people prove they have an actual change of domicile. Failing to take the proper precautions can result in shocking tax bills.
A change of domicile requires the abandonment of a prior domicile, physically moving and residing at your new location, and the intent to make your new home permanent or long-term.
Auditors will analyze your lifestyle using five primary factors to determine where your true home (domicile) is located. You’ll need to prove a majority of these factors in an audit to avoid serious tax repercussions.
The Five Primary Factors in a Change of Domicile
The audit guidelines provide a basic roadmap to how auditors will evaluate your residency. Here are the five primary factors.
1. Home
The first thing they’ll look at your home. If you still own property in one state but claim to be living in another, auditors will look at your pattern of use. Do you spend the majority of time in one residence versus another? Have you established ties in your new location?
For example, if you’re moving from NY to Florida, they will examine the ties you have to your old community. Joining social or religious groups, enrolling children in Florida schools, using local doctors, dentists, and lawyers, or becoming involved in the community in your new state can help.
2. Active Business Involvement
The next thing on the list is whether you continue employment or active participation in a business in New York. This will be weighed against business interests you have outside of NY. Day-to-day activities will carry more weight than passive investments.
3. Time
Auditors will also consider how many days you spent in your old state versus your new one. If you’re moving to Florida, for example, and claiming that as your new home, auditors will want to see that you spend at least 183 days present in Florida during a year. This is the Six Months and a Day rule. By the way, a single minute in NY will count as a day.
4. Near and Dear
Another factor that will be taken into consideration is the location of items of significant sentimental value. Pets, heirlooms, artwork, and other items that enhance the quality of life play a role. If you’re moving to Florida, you’d likely take most (or all) of these with you.
5. Family
Where your spouse and minor children live are also part of the equation. Where minor children go to school is an important factor.
Ancillary Factors in a Change of Domicile
As you can see, the five primary factors in a change of domicile are somewhat subjective depending on the auditor’s assessment. Ancillary factors that come into play include more objective measures, such as:
Voter registration
Vehicle registration
Driver’s license
Homestead exemptions
Addresses listed on bank accounts, bills, and credit card statements
A true change of residency needs to be reflected in your actions.
Failing a Change of Domicile Audit
Audits can be intense and highly evasive. Auditors might check your utility bills to see where you used the most energy, cell phone records that pinpoint location, social media, and more. They might do home visits or even look in your trash.
Thomas Kennedy was a software developer and founder of the company BackOffice. He fell victim to the auditors when he failed to convince them he had changed his domicile to Florida from Massachusetts. He was assessed $8.79 million in taxes, interest, and penalties. Even though he may have spent the required amount of his time in Florida, Kennedy’s wife and children maintained a separate residence in Massachusetts, and he maintained headquarters for two business ventures in the state.
It happened to Martha Stewart. Despite living for several years out of state, auditors produced a certificate of occupancy for a NY home she was having renovated, in which she said she had moved into the NY residence. She had to pay $221k plus penalties and interest.
New York wins more than half of its change of residency tax audits. Some audits can drag on for years. It’s not uncommon for people to be audited even two or three years in a row. Taking on the state often takes years. Businessman and apartment-building owner John Gaied won his appeal, but it took 11 years.
With states like New York seeing more high-income residents moving to Florida and depleted state budgets, expect to see residency audit increase. If you move from New York, your chances of getting audited are near 100%.
There are things you can do to protect yourself and make sure you can pass the change of domicile test. Contact Six Months and a Day to get an audit risk evaluation, learn more about the change of domicile rule, or inquire about white-glove concierge service to ensure a smooth transition.
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