Category: Income Tax

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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
860-767-7893

Categories
Domicile Income Tax

Exceptions to the rule: when Connecticut is home, but you don’t pay tax as a resident

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.

Categories
Domicile Income Tax

The Statutory Resident’s Dilemma

We have all been counting the days since March 16, 2020 when life as normal stopped and our year of COVID-19 began. However, I am not counting days just because I long to belly up to a bar again. The longer this goes on, the more people seeking refuge from COVID-19 away from home will find themselves paying state income taxes in places they did not plan to, sometimes even paying tax twice on the same income.

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. Domicile is the place which an individual intends to be his or her permanent home and to which or he or she intends to return whenever absent. Subject to certain narrow exceptions, if one is domiciled in Connecticut, then one pays tax here.

However, the definition of statutory resident has me counting days. A statutory resident is any individual not domiciled here, who maintains a “permanent place of abode” here (a place you own, a place you rent, somewhere generous friends or family give you unfettered access to, etc.), and who spends more than 183 days of the year here, unless you’re here in Connecticut due to being in the US armed forces.

If you have stayed at your place in Connecticut more this year, perhaps due to COVID-19 and perhaps since March 16th, you may be a resident on September 15.

This is the simplest way of reaching the 183 day count. When considering whether you are a statutory resident a day here includes any part of a day, except for a part of a day during which you merely transit through the state. This means a trip to Connecticut from New York counts as a day in each state, but a road trip from New York to Rhode Island through Connecticut would not count as a day in Connecticut.

So what if you are a statutory resident of Connecticut? Who cares?

You might.

You may find yourself paying tax on the same income twice, in Connecticut and in your state of domicile, potentially without offsetting tax credits. Connecticut is not unique in this regard. Many states have similar rules putting countless individuals at risk of double taxation this year.

By Robert L. Day III
https://www.lawbyday.com
robert@lawbyday.com