Managing more than one residence can mean having to file multiple tax returns. Maybe your primary residence is in New York but you have a vacation home in Florida and you spend a lot of time traveling between different states for business. The question of residency can get very complicated, very quickly. The type of residency you claim, whether its full-year, part-year, or non-resident will depend on your connection to a specific state and will ultimately dictate your tax obligations. However, it's crucial to recognize that your personal perception of your residency status may not necessarily align with the view of tax authorities. While you may consider your permanent home, or ‘domicile’ to be in one state, frequent visits to another state may mean that authorities view you as a resident and therefore liable to pay taxes.
Residence vs. domicile
So what is the difference between a ‘residence’ and a ‘domicile’? In the simplest terms, you can maintain many ‘residences’ but only one true ‘domicile’. In New York, for example, ‘domicile’ is defined as your ‘permanent home’ and the place you ‘intend to return to after being away’. When determining someone’s residency, auditors will often use the ‘statutory residency test’. Spending more than half a year, or 183 days, in a state will render you a ‘statutory resident’ and will make you liable to pay taxes in that state, regardless of where your income was earned. Tax authorities in many states in the U.S. and indeed, many countries globally, use the 183-day rule to determine residency, so understanding this rule and maintaining detailed records is crucial to avoid unexpected tax liabilities.
What constitutes a ‘day’
So what is counted as a day? In many states, any amount of time spent, regardless of the purpose, is counted as one day i.e., ‘a minute is a day’. This includes personal and business activities, as well as weekends and holidays. Other factors such as tax agreements between states and specific rules regarding ‘transit’ can affect the counting of days. For example, if you wake up in Connecticut and drive through New York to go to the airport to fly to Florida and don’t make any stops on the way to meet someone or have a meal, then the time spent in New York would not be counted as a day there. There are certain exceptions to this rule, and things can get complicated pretty quickly, which is why it’s important to seek advice from a tax professional with expertise in residency issues.
The purpose of your presence
Certain states, such as California, not only consider the number of days spent within their borders but also the purpose of the visit. Demonstrating that your presence in the state is temporary and for specific reasons, such as work or short-term visits, can impact the determination of your residency. So it’s crucial to not only document your location and movements but also the purpose of each visit to ensure compliance with the residency requirements of the state.
Residency audits can be long, difficult and invasive. Auditors can and do go to great lengths to obtain information about an individual’s private life and movements. New York officials, for example, are reported to look at cellphone records, social media feeds, veterinary and dentist records, even conducting in-home inspections to look inside taxpayers’ refrigerators.
Use technology to maintain accurate records
In the event of an audit, being able to produce detailed records of your movements and locations will make the process quicker and easier. Technology can be an invaluable tool in this regard. Platforms like Monaeo provide personal audit defense systems that automatically count your days and create digital records that are accepted during residency audits. These tools offer proactive tracking, alerting you as you approach residency thresholds, and providing audit-proven data that can successfully defend your non-residency or part-year residency status. By leveraging technology, you can ensure credible data and digital records, offering peace of mind and a robust audit defense.
Establishing state residency and understanding the 183-Day Rule can be a complex and challenging process and it’s important to seek professional advice from a certified public accountant or lawyer so that they can best advise you according to your specific circumstances. By keeping these key considerations in mind, and using technology like Monaeo to maintain accurate records, you can be better prepared for a tax audit and minimize your tax liabilities.
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Nothing in this article should be considered or construed as tax advice. Monaeo does not dispense tax advice and always recommends that taxpayers consult their accountants or lawyers.