Changing domicile during uncertain times: It may not be as easy as you think

Individuals 10.13.2020 3 MIN READ

The COVID-19 pandemic has dramatically impacted life in urban areas, leading many to seek shelter in states other than their normal residence. Some are reconsidering their long-term living arrangements, including the state where they maintain their domicile. For some individuals, income taxes could be a major factor in this decision.

Your domicile is defined as the place where you have your true, fixed, permanent home—and the place to which, whenever absent, you intend to return. Your domicile does not change monthly or yearly. Once domiciled in a state, your domicile continues there until a new one is established.

To establish a new domicile, you must:

Abandon your old domicile
Have no intent to return to the old domicile
Establish physical presence in a new state
Have the intent to make the new state your domicile

While your intent is subjective, it is not enough to just say that you have the intent to change your domicile. State auditors will require you to prove your intent through a combination of facts and circumstances.

This is particularly relevant for those who’ve maintained a domicile in New York, an early epicenter of the pandemic. When businesses in New York shut down, many left the state for second homes or rentals. There is a long list of factors that states consider when determining whether you’ve changed your domicile but New York, in particular, relies heavily on the following five factors:

The location of your near and dear items (often referred to as the “teddy bear test”)
The size and features of the home you live in as compared to other homes you may own
The location of your business ties
Time spent in New York as compared to the new domicile state
Family connections (the location of your immediate family)

While it is often understood that you should change your driver’s license to your new state of domicile, this action alone is NOT enough to change your domicile. Spending less than 183 days (six months, plus one day) is also often not enough to change your domicile.

Many states, including New York, have a statutory resident rule. This rule defines a resident as a person who maintains a permanent place of abode and spends more than 183 days in a state during the year—but this test does not apply to someone if they are already domiciled in the state. For example, if you are domiciled in New York, you will still be a New York resident even if you spend less than 183 days in New York in 2020.

Spending time out of your resident state, when you intend to return at a later time, does not change your domicile. This is true even if you don’t know exactly when you will return. A temporary absence does not change your domicile.

Importantly, domicile audits do not occur immediately and often occur a few years after you changed your domicile. The analysis of auditors will take into account where you have been spending your time from the date you changed your domicile, up to when the audit occurs. What you do in 2020 would not be the only deciding factor.

If you are looking to change your domicile, continuing to own or rent a home in your former state can cause challenges when trying to prove your intent. Many of the difficult domicile audits that Ayco has seen stem from individuals continuing to own or rent a home in New York after moving out.

Keep in mind, even in the case where you have legitimate intent to change your domicile and take proper steps to do so, that does not mean that you will no longer owe taxes to your former state. Certain states, including New York, have a convenience of the employer rule that taxes nonresidents on income earned or sourced to the state. For New York, this typically includes work performed from home for a company located in the state. New York will also tax any residual, sourced income you’ve earned in New York that is paid out at a later date. It is possible to end up in a situation where you will have to pay tax to your new domicile state and to the state where your employer resides, with no credit for the double tax.

Many of these considerations apply not just to changing domicile out of New York to another state, but rather a similar analysis applies to a domicile change to or from any state. Changing domicile from New York City to another location in New York can also raise additional challenges.

If you are considering changing your domicile and would like more guidance about this process, please reach out to your tax advisor or your Ayco Advisor.

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