As discussed in the Statutory Resident’s Dilemma, in Connecticut, residents pay income tax on all of their income, which is sometimes reduced by a credit for taxes paid to other jurisdictions. There are two types of residents: those domiciled here, and so-called statutory residents (this second type is discussed in the previous article). Domicile is the place which an individual intends to be his or her permanent home and to which he or she intends to return whenever absent. Subject to certain narrow exceptions, if one is domiciled in Connecticut, then one pays tax here. This article focuses on those narrow exceptions.
Even if an individual is domiciled in Connecticut, the individual is not a resident for state income tax purposes if the individual meets one of two tests. The first test has three requirements. An individual will be taxed as a nonresident even if the individual is domiciled in Connecticut if during a full taxable year the individual: does not have a permanent place of abode in Connecticut (See FN1), maintains a permanent place of abode outside Connecticut; and spends in the aggregate no more than 30 days of the taxable year in Connecticut.
For the two tests discussed herein, and as with counting days for purposes of being a statutory resident, a day spent in Connecticut includes any part of a day, except for a part of a day during which you merely transit through the state.
This first test is fairly straightforward. Imagine if a potential taxpayer (we’ll just call this person a taxpayer for simplicity’s sake) that is domiciled in Connecticut sells his home in Connecticut and leaves the state for a few years living in a condo that he owns in another state. This taxpayer only returns to Connecticut for the holidays (fewer than 30 days in a given year) and stays in a hotel when here. Eventually, the taxpayer buys another home in Connecticut, which he’d always intended to do. This taxpayer will not be required to pay taxes as a resident for those years in which he does not have a home in Connecticut and in which he does not exceed the 30 day limitation, even though he always planned to return to Connecticut.
The second test is relevant for individuals spending time abroad and it is more complicated. Under the “548-Day Rule” a Connecticut domiciliary will be taxed as a nonresident if during any period of five hundred and forty-eight consecutive days the individual: (i) is present in a foreign country or countries for at least four hundred and fifty days, (ii) is not in Connecticut for more than ninety days, (iii) does not maintain a permanent place of abode in Connecticut that the person’s spouse (unless legally separated) or minor children are present at for more than ninety days, and (iv) during the nonresident portion of the tax year in which the test period begins, and during the nonresident portion of the tax year in which the test period ends, the person was present in Connecticut for no more than the number of days which bears the same ratio to 90 as the number of days in such portion of the tax year bears to five hundred and forty-eight.
A more complex example is necessary to understand the second test.
Let’s imagine a taxpayer who had lived in Connecticut for a number of years with her husband and two children. The taxpayer had an opportunity to spend about two years working in the overseas office of her employer. She relocated to a foreign country on May 1, 2015 for work. Her husband and children remained in Connecticut to finish the school year and they joined her in the foreign country on June 25, 2015. In 2015 and 2016 the taxpayer and her family came home to Connecticut on December 23rd and returned to the foreign country on January 1st 2016 and 2017, respectively. In September 2015 the family took a trip to California for 14 days. The entire family moved back to Connecticut on June 1, 2017.
In this example the first possible 548 day testing period is from April 1, 2015 (when the taxpayer first left the country) thru October, 29, 2016 (548 days after the Taxpayer first left the country). During this period the taxpayer was present in a foreign country for 524 days, exceeding the requirement to be present in a foreign country for 450 days and satisfying the first part of the four part test explained above. She also spent only 10 days in Connecticut during the test period, satisfying the second part of the test above. Her husband and children spent 66 days in Connecticut at their home during the test period, which is fewer than the 90 days permitted, satisfying the third part of the test.
The fourth part of the test is more complex. This part of the test keeps a taxpayer from front or back loading too many of her days in Connecticut. To meet the fourth requirement one must compute the ratio of days spent in Connecticut during the nonresident period of a year to 90. The nonresident period of a year is that part of a year where a taxpayer claims to be a nonresident. For purposes of the 548-day rule there is a nonresident period both in the year in which a taxpayer leaves the state and the year in which the taxpayer returns to the state. In the example the Taxpayer spent 9 days in Connecticut during the nonresident part of 2015. The ratio of 9 to 90 is 0.1. This ratio is then compared to the ratio of the number of total days in the nonresident period to 548 days. In the example there are 245 days in the nonresident part of 2015 (from May 1, 2015 thru December 31, 2015). 245 divided by 548 produces a ratio of 0.535. Here the Taxpayer’s ratio of days spent in Connecticut (0.1) is less than the ratio of testing period days in a given year (0.535), and therefore the taxpayer also passes this fourth part of the test.
And there we have the two situations in which someone that is admittedly domiciled in Connecticut is not required to pay Connecticut income tax as a resident of the state. Keep in mind that the person may still have to pay tax on income which is sourced to Connecticut, but this is a topic for another article.
If you are domiciled in Connecticut, but may qualify to be taxed as a nonresident based on one of the two situations discussed above you should consult with a licensed tax professional to confirm whether or not your facts fit within these exceptions.
By Robert L. Day III | robert@lawbyday.com
FN1 – While we sometimes simply refer to a “home” in Connecticut, technically a “permanent place of abode” means a dwelling place permanently maintained by an individual, whether or not owned by or leased to such individual, and generally includes a dwelling place owned by or leased to his or her spouse. Generally the definition excludes a dwelling place owned by an individual who leases it to others, not related to the owner or his or her spouse by blood or marriage, for a period of at least one year, where the individual has no right to occupy any portion of the premises and does not use such premises as his or her mailing address during the term of the lease. Also, a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode.