Where Do You Really Live? - A Question of Taxes

Posted By Jay Kaufman || 17-Oct-2011

For Clients, Advisors and Community

Our society is increasingly mobile. Many of our clients have multiple residences. They spent the spring and summer months in the Chicago area but spend the late fall and winter in warmer climates – Florida, Arizona, California, Hawaii and other locations.

In a sometimes desperate chase for increased revenue, Illinois (and other states) have recently passed often significantly increased taxes on income and on estates of decedents. Many of these states have also passed increased taxes on business and have developed climates unfriendly to business. I hear often from my Illinois clients that they want to relocate to escape the high taxation in this state and move or retire to states with lower taxes like Florida and Wyoming. Many are of the belief that you can change your domicile and therefore the jurisdiction in which you are taxed by spending the majority of time and simply getting a drivers’ license and registering to vote in a new state.

It’s not that simple. Each state has its own rules for determining whether an individual is subject to income or estate tax in a given state. And, the determination can be different for husband and for wife!

There are basically two approaches to this question. Illinois and California and a few other states have adopted an approach that states that a resident is one who is in the state for other than a temporary or transitory purpose during the tax year or whose domiciled in the state but absent from the state for a temporary or transitory purpose during the year.

In order to make a determination these states look at various factors which may include the amount of time spent in another states versus the amount of time spent in Illinois; the location of the spouse and children; the location of the principal residence; the state that issued a driver’s license; the state of voter registration; state where professional licenses are; location of banks; location of medical, legal and accounting professionals and state where social ties and/or permanent work assignments.

New York and other states take a different approach. There are two prongs to the New York test. The first asks if the individual is domiciled in New York. Domicile is subject to a “five factors” test. They are: home, active business involvement, time, near and dear items and family. Time is probably the most important element. But, there is also an alternate “residency” test to be passed as well. An individual is taxed in New York if he or she maintains a permanent place of abode in New York and spends more than 183 part or full days there during a taxable year.

As one can readily see, these tests can be very subjective. If you’re planning to flee the jurisdiction to reduce your tax bill, be sure you do it the right way and consult an expert who is familiar with the particular rules involved.

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