Statutory Residency – The Basics, The Ins, The Outs

Perhaps no issue causes more havoc in the personal state income tax area than that of “statutory residency.” Taxpayers who run afoul of state statutory residency rules can find themselves subjected to tax not only in their state of domicile (the state considered their permanent resident state) but also in another state. Statutory residents are subjected to the full taxing authority of the state just as if they were domiciled there. Consequently, taxpayers can be subjected to multiple state income taxes on the same income. Depending on the affected person’s income situation, they may be able to alleviate the issue somewhat on their W-2, business and rental earnings through the application of state tax credits. However, any income from intangibles they have (e.g., interest, dividends, etc.) may be fully taxable in both states without the benefit of credits, thus leading to a “pyramiding” effect of their state tax rates.

Statutory Residency – The Basics

In its simplest sense, the concept of statutory residency is centered around two factors: time and place. Under most state statutory residency provisions, a person who is domiciled elsewhere but who maintains a “place of abode” in the state and is physically present therefor a prescribed time period is considered a “statutory” resident of that state. Typically, a “place of abode” is a residence that includes sleeping, cooking, and bathroom facilities that are suitable for year-round living.

Although the “time” element may vary by state, the most common period required to trigger state statutory residency laws is “more than 183 days within the taxable year.” Any part of a day spent in the subject state will generally be considered an “in-state” day for the day count, subject to minimal exceptions. Taxpayers who file joint state returns should note that their in-state days may be added together to arrive at a total day count, with days in which both parties are in the state simultaneously not being double-counted. A common misconception is that if a taxpayer does not sleep overnight in the non-resident state, it will not count against their in-state day count. To be clear, that is not the case. In a state residency examination, auditors will typically require taxpayers to submit daily logs of their whereabouts and may also subpoena third party records such as cell phone records, credit card statements, EZ-pass and similar records which will demonstrate where a taxpayer was on a particular date.

Statutory Residency – The Ins

A minority of states’ statutes do not require a non-resident taxpayer to maintain a place of abode in the state to fall within the scope of their statutory residency provisions. In such cases, a taxpayer’s physical presence in the state for a defined period could suffice to activate such provisions. Those states are Arizona, California, Georgia, Hawaii, Illinois, Kansas and Michigan.

Statutory Residency – The Outs

Two jurisdictions, the District of Columbia and Virginia, don’t necessarily require any physical presence within their borders to provoke the statutory residency provisions. In both cases, maintaining a place of abode inside their bounds for greater than 183 days in the tax year is sufficient to be considered a resident.

Don’t Forget Domicile Residency

Many times we hear our clients tell us “I made sure to not spend more than 183 days in “X” state so they can’t consider me to be a resident, right?” Maybe not. While spending less than 183 days in a state may serve to avoid statutory residency, domicile residency is a “state of mind” which is a highly subjective issue that one must also consider and is what many state tax auditors spend most of their time examining when determining residency. As a result, when moving from one state to another, it is critically important that the taxpayer: 1) intends to abandon his or her domicile, in the state the individual is moving from; and 2) intends to establish a new domicile in a new state. Both of these items have to occur for a change in domicile to exist. Further, it is very important that the facts establish and support this intent in order to be successful in a change-in-domicile audit.

Conclusion

Statutory residency can present a problem for taxpayers and result in multiple states taxing the same income. State auditors are keenly aware of the provisions and often look to ensnare unwary non-resident individuals to increase the state’s coffers. Taxpayers who spend significant amounts of time and/or who own or have access to multiple homes in two or more states must be cognizant of the amount of time that they spend in them in order to avoid inadvertently becoming a statutory resident for income tax purposes.