Although “domicile” and “residence” may be synonyms in any thesaurus, the legal definition of those two words and how that definition applies to your taxes are not the same.
In today’s post, I’ll explain the difference between domicile and residence, and I’ll fill you in on what to consider before changing your domicile state.
Are domicile and residence the same thing?
Simply put, no. As it applies to taxes, domicile and residence are not the same thing.
Your domicile is the place you call your permanent home. It’s where you return after trips and where you set up your home base. Your domicile is also seen as your legal residence. For tax purposes, you only have one state of domicile. And, as with all things that apply to state taxes, different states have different qualifications they use to decide if you can claim domicile in their state.
On the other hand, your residence is where you currently live. It can be a primary residence or a temporary residence like a second home. For tax purposes, you can have more than one residence in a tax year.
What should I consider when I want to change my domicile state?
Some people consider changing their domicile state to avoid income taxes or to pay less in taxes once they’re retired. Others might consider buying another home or moving to a different home for a new job, to be closer to family, or to be closer to the ocean (I feel ya!).
No matter the reason, if you’re considering changing your domicile state, it makes sense to think about how this change can affect different areas of your life. To help with this process, here are some important questions to consider:
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Where are your most significant connections?
- Family
- Property ownership
- Voting registration
- Community involvement
- Did your place of employment change?
- If you own your own business, did you register your business in your new state?
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Should you update the following?
- Mailing address with the postal service and other government agencies like the IRS
- Driver’s license in your new state
- Vehicle registration in your new state
- Voter registration in your new state
- Bank account and investment accounts in a bank or financial institution based in your new state
- Pharmacy
- Medical providers
- Membership in social clubs, professional or personal societies, churches, charitable groups, or other local organizations
- Burial plots
- Is this move going to be temporary or permanent?
Changing my domicile state is a good choice for me, but how do I file taxes now?
Once you’ve decided to change your state of domicile, you’ll want to keep track of how many days you spent in your old state versus your new state. Although each state has their own tax rules, if you’ve permanently lived in a state (domicile) for more than half of the year, you’ll typically be considered a resident of that state for income tax purposes.
At tax time, you’ll file a part-year state tax return with each state. If given the option on the state tax forms, you’ll want to mark the old state as “final.”
And this bit is important: It’s not uncommon for states to conduct residency audits (they all want your tax money), so you’ll want to be sure that you can provide evidence to support your change in domicile. A wonky part of the law has to do with your intent to make a place your home. If you’ve shown intent to change your domicile by doing things like updating your mailing address, driver’s license, and other personal and banking information (see list above), then it will be easier to prove to the state that your domicile has changed.
Even if you believe your domicile state is clear, there may be times when a state will require you to file a non-resident tax return. For instance, if you live in one state but work in another, you may be on the hook for taxes in both states. Similarly, even when you are considered a nonresident of a state, you may still owe taxes in that state if you do business there. Because there are so many different nuances to the tax laws in each state, you should consult with your tax advisor to determine which states you should be filing in.
If you’re considering moving your home or your business, these other posts may be helpful to you:
