Domicile DRS Income Tax

On Moving (and proving that you did)

In this article we will discuss change of domicile or “moving”. This article is written with Connecticut law in mind, but readers may find the laws similar in other states. As always, consult a licensed tax attorney for advice concerning changing your domicile.

If done correctly, a change of domicile to someplace other than Connecticut will result in paying tax as a nonresident in Connecticut, if at all (so long as you don’t become a statutory resident).

A person may move to another state for any number of reasons. These can include work, leisure activities, a preferred tax regime, or family. Unfortunately, sometimes these would be movers fail to demonstrate their intent with the physical evidence the Connecticut Department of Revenue Services (“DRS”) looks for during an audit.

Properly documenting a change of domicile is critical if the DRS initiates a domicile audit. Domicile audits may be conducted by the DRS whenever it believes a person may have been domiciled in Connecticut in a certain tax year, but that person either failed to file a Connecticut income tax return or filed a nonresident income tax return.

Domicile is the place which an individual intends to be his or her permanent home, and to which such individual intends to return whenever absent. Once established, domicile continues until a person moves to a new location with the intention of making that location his or her new domicile. In Connecticut the burden of proof is on the individual to show he or she had the proper intent when changing domicile to another state. This intent must sometimes be shown during an audit with the Connecticut DRS, or in court by the presentation of evidence.

In the most egregious situations, where one is taxed as a resident of multiple states, an individual may have to pay tax on “un-sourced income” (such as interest and dividends) in Connecticut and in a new state of residency.

The easiest way to change your domicile is to break all ties with the state and to move away for good. Imagine your own childhood, when a friend in elementary school moved away. A For Sale sign went up in front of the house, movers showed up one day and loaded up all of the family’s possessions, and the next day the family took off to their new home. Never to be seen or heard from again, until years later when you found your friend on Facebook only to learn that the family moved to Texas and they have been there ever since.

We’ll go through the technicalities of why such a move effectively changes one’s domicile later in the article, but in my experience the most clear cut way to change your domicile is by disposing of your assets in Connecticut while simultaneously breaking personal ties with the state, and then acquiring a new home and forming new connections in another state. Unfortunately, the facts and circumstances of life rarely afford people the opportunity for such a clean break these days.

Many different facts are considered by the DRS during a domicile audit and would also be considered by a court if a domicile matter were to be litigated. The relevant regulation has twenty-eight specific factors:

(A) location of domicile for prior years;
(B) where the individual votes or is registered to vote (casting an illegal vote does not establish domicile for income tax purposes);
(C) status as a student;
(D) location of employment;
(E) classification of employment as temporary or permanent;
(F) location of newly acquired living quarters, whether owned or rented;
(G) present status of former living quarters, i.e., whether it was sold, offered for sale,
rented or available for rent to another;
(H) whether a Connecticut veteran’s exemption for real or personal property tax has been claimed;
(I) ownership of other real property;
(J) jurisdiction in which a valid driver’s license was issued and type of license;
(K) jurisdiction from which any professional licenses were issued;
(L) location of the individual’s union membership;
(M) jurisdiction from which any motor vehicle registration was issued and the actual
physical location of the vehicles;
(N) whether resident or nonresident fishing or hunting licenses were purchased;
(O) whether an income tax return has been filed, as a resident or nonresident, with Connecticut or another jurisdiction;
(P) whether the individual has fulfilled the tax obligations required of a resident;
(Q) location of any bank accounts, especially the location of the most active checking account;
(R) location of other transactions with financial institutions, including rental of a safe deposit box;
(S) location of the place of worship at which the individual is a member;
(T) location of business relationships and the place where business is transacted;
(U) location of social, fraternal or athletic organizations or clubs, or a lodge or country club, in which the individual is a member;
(V) address where mail is received;
(W) percentage of time (excluding hours of employment) that the individual is physically present in Connecticut and the percentage of time (excluding hours of employment) that the individual is physically present in each jurisdiction other than Connecticut;
(X) location of jurisdiction from which unemployment compensation benefits are received;
(Y) location of schools at which the individual or the individual’s immediate family attend classes, and whether resident or nonresident tuition was charged;
(Z) statements made to any insurance company concerning the individual’s residence, on which the insurance is based;
(AA) location of most professional contacts of the individual and his or her immediate family (e.g., physicians, attorneys); and
(BB) location where pets are licensed.

As you read through the items above you no doubt realized that some of these factors are easier to shift in one’s favor than others. For example, if you were a long time Connecticut domiciliary then your location of domicile in prior years will count against you in a Connecticut domicile audit. There’s not much one can do to flip a factor like this one. Other factors, such as status as a student, or location of employment, may be irrelevant if an individual is leaving the state to retire elsewhere. Because so many factors will either be irrelevant or difficult to shift, those factors that are within the control of a taxpayer must be paid careful attention to.

Reading the factors also probably helped you understand why simply moving away (like the hypothetical childhood friend mentioned above) very likely changes one’s domicile. When someone packs up his or her things, sells their home, and buys a new one, never to return, one also naturally address many of the the various indicia of domicile above.For example, one will likely not continue to see a doctor, receive mail, or retain a driver’s license in Connecticut if that person has sold his or her house here and moved to a new one in Florida. But as previously noted, life rarely affords individuals the ability to make such a clean break. Therefore, planning a change of domicile and collecting the necessary evidence to prove a change of domicile is often quite important.

Beyond what is considered by the regulations, there are other factors that I believe are also important based on my experiences guiding clients through domicile planning and audits. In future articles we will discuss the factors that I have seen most carefully reviewed by the DRS during audits, how to keep track of evidence during a move, and some factors not listed here that are worth considering should you decide to move away.

By Robert L. Day III
Law By Day PLLC