It should be easy to know where you live, but for state personal income tax purposes, the question becomes “where are you domiciled?” Most states generally impose personal income tax on the income earned by taxpayers (regardless of where that income is earned) who are “domiciled,” i.e., permanently residing within their borders. It can be crucial for certain taxpayers to understand how states determine domicile, particularly considering taxpayers that own more than one residence or that temporarily relocate for work or personal obligations.
An Alabama Tax Tribunal decision illustrates the complexity of establishing a domicile. In Sawyer v. Alabama Department of Revenue, the tax tribunal determined that a taxpayer was not subject to an assessment of Alabama personal income tax because the taxpayer was not domiciled in Alabama. The taxpayer lived with his mother in Alabama until 1998 when he moved to Georgia. While living in Georgia, the taxpayer started a business and then subsequently moved to Nevada in 2006. Since the inception of his business, the taxpayer’s Alabama-domiciled mother handled the books and other necessary administrative duties. The taxpayer also maintained an Alabama driver’s license and registered his personal and business vehicles in Alabama. In 2012, the taxpayer moved back to Georgia and lived there until 2015 when he finally returned to Alabama.
The tribunal found that the taxpayer abandoned his Alabama domicile in 1998 and did not re-establish his Alabama domicile until 2015. The taxpayer’s abandonment of Alabama was not considered to be a mere absence from the state because the taxpayer had no intention of returning to Alabama upon his decision to move to Nevada to focus on his business. The facts also supported the position that the taxpayer moved to Nevada with the intent on living there permanently – providing evidence of house leases, utility bills and voter registration documents. Finally, the tribunal noted that the fact that the taxpayer’s mother handled the books for his business from Alabama, that the taxpayer maintained an Alabama driver’s license and that he registered his personal business vehicles in Alabama did not mean that the taxpayer was domiciled in Alabama.
Those who maintain multiple residences should consider whether a change in domicile has occurred. The analysis is usually very fact specific, the salient question being where do you intend to stay permanently? A few questions to consider in determining whether a change in domicile has occurred:
- Does the state maintain a statutory length of stay to qualify as a resident, i.e., 183 days?
- Are you registered to drive and/or vote in the state?
- Do you own or lease property in the state?
- Are you employed in the state?
- Is your family located in the state?
- Have you made other affirmative actions indicating your intent to stay permanently?
Generally, no one factor is determinative, but it’s easy to imagine a situation in which you unknowingly and unintentionally become domiciled in a different state. If you reside in or earn income in more than one state, you should be familiar with how the establishment of a new domicile may impact your personal income tax obligations – whether credits are available for taxes paid to other states, and whether and to what extent your income must be reported to the state. Additionally, changing domicile may be advantageous under a number of other circumstances not addressed here.