United States

Arkansas ruling highlights need for residency analysis

INSIGHT ARTICLE  | 

In a recent administrative ruling, an Arkansas Department of Finance and Administration income tax assessment was upheld when an administrative law judge ruled that the taxpayers were residents of the state during the years at issue.

The taxpayers challenged the assessment claiming that they were no longer residents of Arkansas. The taxpayers resided in Arkansas until 2013 when they asserted that they moved out of the state for employment reasons. The taxpayers rented housing and forwarded their mail to their new address before moving back to Arkansas in 2018. The department issued an income tax assessment against the taxpayers for 2013 through 2018 asserting they remained residents of the Arkansas.

On appeal, the administrative law judge found that the taxpayers had not abandoned their Arkansas residency. The judge found that the following actions “consistently and strongly” demonstrated that the taxpayers intended to return to Arkansas: they continued to own a home and livestock in Arkansas; they claimed the Arkansas homestead tax credit; retained and renewed Arkansas driver’s licenses; and remained registered to vote and voted in Arkansas. Based on all of the facts and circumstances, the judge held that the taxpayers were clearly residents under Arkansas law.

Takeaways

Taxpayers are working remotely more than ever and many employers and employees are likely to continue those arrangements after the COVID-19 pandemic ends. Taxpayers that continue to telework may be considering moving to jurisdictions with a lesser tax burden, to be closer to family, or to locations more conducive to their lifestyles. Relocating to a new jurisdiction and renouncing the prior jurisdiction can be complicated from a state and local tax perspective, especially when taxpayers intend to maintain some roots in their prior home state. More than an internet search should be considered before relocating to a new state.

The Arkansas decision highlights the need for taxpayers to consider what constitutes a change of residence for tax purposes. Most state revenue departments would consider voting and maintaining a driver’s license in their state as prima facie evidence of residency. However, there are dozens of factors taxpayers should consider and review before moving. As it was in the Arkansas case, questions of residency are fact specific. Some of the other facts that may give rise to a determination of residency are length of stay, owning or leasing property, where medical care occurs, and location of family and even pets. Yet, no one factor is determinative.

Additionally, general residency planning should consider all state and local tax burdens, including property taxes and sales and use taxes. Taxpayers should also consider the impact of residency changes on social security benefits, pension income, retirement plan distributions, inheritance taxes, and other estate and gift tax obligations.

Taxpayers considering relocation should consider a comprehensive residency review in order to minimize continued state and local income tax exposure in their prior location.

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