For those with a single home, and who spend only the occasional vacation weeks away from it, determining your legal domicile is hardly ever a question that needs to be seriously scrutinized. However, if you divide your time between multiple residences in different states, identifying and proving which residence is your legal domicile can be a very serious matter, and can cost you thousands in state income taxes every year.
Here’s what you need to know about how domiciles are determined, how you can prove which of your homes is your true domicile, and how all of this affects your taxes.
How Are Domiciles Determined?
You might think that the question of legal domicile is as simple as showing where you spend the majority of your time. And while the number of days you live in a residence throughout the year is one factor that will be looked at, it is also based on your intent. Your domicile is defined as your primary residence, where you intend to remain and return to, despite time spent in other locations.
Obviously, you are the only one who knows your true intentions. But, unfortunately, officials are not exactly inclined to take people at their word in these cases, as claiming domicile in one state could offer you significant tax breaks. (We’ll talk about that more later.) So, you are now left with the burden of proving what your intentions are in regards to your multiple residences.
What kind of proof do you need to legally establish your domicile? Let’s take a look.
How Can You Prove Your Domicile?
As we mentioned in the previous section, the amount of time you spend in a residence will be considered when determining your domicile; so, you’d be hard-pressed to claim your Florida townhome as your domicile if you’re only spending two weeks there every summer. But if you split your time almost evenly between states, there is other evidence that will be considered.
As an example, let’s say you spend the spring and summer in Florida every year, and spend the fall and winter in Utah. Your time between residences is almost equally split. However, some years, you only go to Florida for a month or two in the summer. And, when that townhome is not in use, you list it for rent on a weekly or monthly basis. Your Utah home, however, is only ever inhabited by your own family.
This sets up a pattern of behavior, which would likely indicate that your Utah home is your primary residence. It is to Utah that you return regularly, and where you maintain a residence solely for your family.
Documentation, as you might have guessed, is also important when establishing your intent. So, if your cars are all registered in Utah, you have a Utah driver’s license, and you’re registered to vote in Utah, you would likely be considered a Utah resident, and be subject to that state’s income tax laws. And those tax laws are why this all matters in the first place.
Why Does Your Domicile Matter?
Whatever state you are domiciled in, that state can claim you as a legal resident. And, as a resident, you are subject to any state income taxes that the state imposes—and that tax would be applied to all income you earn, regardless of whether it was earned in that state, or in an entirely different country. Other states can only tax you on income that you earn within that state.
State income tax rates vary widely: While some have no income taxes, other have tax rates reaching into the double digits. So, as you can probably guess, it would be wildly beneficial to you if you could claim an income tax-free state as your legal residence.
In the example mentioned above, let’s say you maintain that home in Florida so that you can work at your parents’ family-owned business during their busy season. Because the income is earned in Florida, the state of Florida would tax that income; however, Florida does not have an income tax, so they would take nothing out of your paychecks. But because the wealth of evidence establishes your domicile is in Utah, the state of Utah will also tax all of the income you earned while in Florida at the current tax rate (4.95%).
You can see why you might wish to claim your Florida townhome as your domicile in this instance, so that you wouldn’t lose any of your income to Utah state taxes. However, this would be difficult to do, with all of the documented ties you maintain to Utah. So, you would continue to be subject to those state taxes until such a time that you are able to prove Florida as your primary state of residence.
If you have any questions regarding establishing your domicile, or you’re having any issues connected to your state income tax, contact Biesinger & Kofford to speak to one of our Provo state and local tax experts today.