High income taxpayers beware. Almost all states have laws or Constitutional requirements that they balance their budgets, and one way they do so is by auditing taxpayers who move out of state – to avoid the loss of tax revenue – by forcing them to prove they are no longer a resident. If you are moving from one state to another, especially if you are a high net worth individual, these are a few red flags that will draw the attention of your departing state’s Department of Revenue.

• Visiting the state more than half the year. States generally treat taxpayers as residents if they are in the state more than half of the year. Visiting friends and family, vacationing, and even doing business in a state will all count as days in the state. It is also important to know what the state considers half a year to be – it may be 180 days, 182 days, or 183 days.
• Moving from a high-tax state to a low- or no-tax state. There is nothing inherently wrong with moving states, or even moving from a high-tax state (such as California, Illinois, New Jersey or New York) to a low- or no-tax state (such as Arizona, Florida, Nevada or Texas). But when a taxpayer in a high income tax bracket does so, especially right before triggering a taxable event (such as the sale of a business or a large raise), then states may lose substantial amounts of tax revenue, causing them to examine whether the taxpayer has, in fact, actually moved states.
• Keeping a permanent home in the state. States are suspicious of taxpayers who claim to have moved from one state to another but keep a home in the original state. Sometimes taxpayers use the residence as a vacation spot, a place for their children to live, or as a rental property. But the “first” state may consider that residence to be evidence that the taxpayer has not really moved.
• Not changing domicile. Domicile is different from maintaining a home. A taxpayer who is domiciled in a state resides there with the intention of staying there. Thus, if a taxpayer claims to have moved to another state but maintains their car registration, their voting registration, a home, or a business, for example, in the first state, then the first state may claim the taxpayer still has their domicile in the first state and never established it in the second state. Paying in-state tuition at a college or university in the first state may also show that the taxpayer is still domiciled in the first state. Conversely, registering to vote, registering a car, selling the home in the first state, buying a home in the second state, starting a new business in the second state, paying in-state tuition only in the second state can all help show that the taxpayer is newly domiciled in the second state.

For taxpayers planning to change residences, or who have already done so, the burden will be on them to prove to the first state that they are no longer residents subject to that state’s taxes. Evidence can include documents related to a long-term plan to move, receipts, banking and credit card information, emails and other documents. But keep in mind that the most important information may be in your phone, which tracks every step you take, every move you make and every website you visit. During an audit, your phone can be your greatest asset or your largest liability.

For more information about changing residency and establishing domicile, please contact Brian Bernhardt, at 704.384.2607 or bbernhardt@foxrothschild.com, or another member of Fox Rothschild’s national Taxation & Wealth Planning Department.