Two tests, either of which is sufficient
Most people treat residence as a single question. States generally apply two, and being caught by either is enough to be taxed as a resident on worldwide income.
- Domicile. The place a person treats as their permanent home and intends to return to. Domicile changes only when a new one is established, and it persists until then. It is a question of intent, evidenced by conduct.
- Statutory residency. A mechanical test, typically combining a day count in the state with maintaining a permanent place of abode there. Intent is irrelevant. A person who has genuinely moved their domicile can still be a statutory resident of the old state and be taxed accordingly.
What a day is
Day counting sounds like arithmetic and is mostly definitional. In many states any part of a day spent in the state counts as a full day, with narrow exceptions for travel passing through.
The practical result is that a morning meeting counts, a connecting flight with a hotel night counts, and a weekend visiting family counts. Taxpayers who believe they were comfortably under a threshold frequently were not, and discover it against a record their own phone and card statements supply to the examiner.
What the evidence actually looks like
Residency audits are among the most document-intensive examinations a private individual is likely to face. The examiners are experienced, the questions are specific, and the pattern of enquiry is well established.
| Category | What is examined |
|---|---|
| The home | Relative size, value and use of the old and new residences. Whether the old one was sold, rented at market, or kept available. A retained house that no one else uses is the single most damaging fact |
| Time | Day counts reconstructed from card transactions, mobile phone records, toll and travel data, and calendar entries |
| Items near and dear | Where the possessions that matter to the family went. Art, heirlooms, pets, and family photographs are asked about directly |
| Business connections | Where work is actually performed, where the office is, how often the old state is visited and why |
| Family | Where the spouse lives and where minor children attend school. A family remaining behind is close to decisive |
The administrative changes, meaning licences, registrations, voter records and professional addresses, matter and they are the weakest category of evidence. They are easy to do, examiners know they are easy to do, and doing them while the family, the house and the working week stay put persuades nobody.
The year of the move
The most expensive mistakes cluster in a single year, and they are mistakes of sequence rather than substance.
- 01Recognizing a large gain before the move is complete. A liquidity event in the departure year is generally taxed by the old state, and in some circumstances income with a source in that state remains taxable there regardless of residence.
- 02Equity compensation earned in the old state. Many states apportion income from options and restricted stock by reference to where the services were performed during the vesting period, not where the holder lives when it vests. Moving before a vest does not necessarily move the income.
- 03Keeping the house. A retained residence supports both the domicile argument and the statutory residency test simultaneously, and it is the fact that most commonly loses the case.
- 04Treating the move as a date rather than a process. The evidence that decides the audit is created continuously during the year and cannot be assembled afterwards.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.