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Prove residency to pass state tax audit

If you own homes in multiple states, establishing residency in the lower tax state can help your tax bill. Turning your second home into your “main home” and establishing legal residency takes more than just careful record keeping, however.

Many states have been cracking down on snowbirds who want to claim residency in “no income tax” states like Florida or Texas while still maintaining their original home. But retirees aren’t the only ones under scrutiny. States are keen to capture income tax from mobile, high net worth individuals who may live and work in more than one place.

Each state has different residency rules, so talk to an advisor to understand yours. Generally speaking, it’s not enough to spend 183 days (six months plus one day) outside your higher-tax state. You may have to meet a higher threshold and prove to tax collectors that you were where you said you were.

Proceed with caution. If you get audited and fail to pass the residency standards, you could be subject to unpaid tax bills with penalties and interest. Worse yet, if you die without establishing clear residency, more than one state may claim you owe income and state death taxes.

Additional complications come into play if you receive alternative forms of income, such as unvested options and deferred compensation. While you might expect to pay tax in your state of residency when you exercise those options, other states may seek payment based on where the work was performed over the vesting period.

Here are some tips for establishing domicile:

  • Get a driver’s license and register your car in your new state.
  • Register to vote in your new state.
  • Establish bank accounts in your new state and close old ones.
  • Operate your former home as a rental property.
  • Change your address on important documents, including passports, wills and trusts.
  • Move your pets with you to your new residence.
  • Keep a record of how many days you spend in each state.

Apps such as TaxDay, TaxBird and Monaeo will count the days you spend in each state and alert you when you get too close to the limit. Certain apps have features that help you track other proof-of-location records, such as toll passes, credit card swipes, or transit fares.

When establishing residency, auditors look at your comprehensive life circumstances, not just certain “check the box” requirements. Are you still involved in a service club or church groups back in your original home state? Where do you host family gatherings? The closer to the minimum-day threshold you spend in your new state, the closer auditors will look.

Recognize that even if you establish residency in a “no income tax” state, another state may still require you to file a nonresident tax return and pay income tax on any income sourced there.

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