Determining State of Residence and How It Affects Your Income Tax

House made of $100 billsYour state of residence is quite easy to determine, isn’t it? It’s the state you live in, the state where your house is located. But what if you have more than one property, and they’re located in different states? In these cases, determining your legal state of residence (or legal domicile) is more complicated than you might think, and it’s not solely based on the amount of time you spend in each location. Keep reading to learn how you can determine your legal state of residence, and how that determination will impact your income taxes.

Time Is Only Part of It

You might think that your legal domicile would be wherever you spend the most days each year. And while this is certainly a factor that must be taken into consideration, it’s not the only one that matters. Interestingly enough, the true determining factor is your “intent” with each property you own. Obviously, that’s a bit of a gray area, and you can’t simply pick whichever residence you want as your legal domicile and expect the government to take you at your word.

Many people have attempted to falsely claim a state of residence for the tax benefits (more on that later), so you must be able to clearly prove your intent in relation to your different residences. Once you provide your proof, the final decision falls to a judge, revenue agent, or other third party to determine your legal domicile.

But how do you prove your intent? Through your documentation and your behaviors.

Documents and Behavior Patterns

As in most things related to the law and taxes, documentation is an important part of proving your legal domicile. So, let’s say you have a residence here in Florida, and another in Texas. You own two cars, and they’re both registered in Florida. You have a Florida driver’s license, have a business here, and you’re registered to vote here as well. This gives a strong indication that Florida is your legal residence. However, the third party making the final decision will want to look at your behaviors as well.

So, let’s say that you spend the spring and summer in Florida, but go to your home in Texas every fall and winter. This divides your time between the two states quite evenly. However, when you’re not staying in your Texas property, you rent it out, while your Florida home is only ever occupied by you. There are also some years where you cut your time in Texas short, and return to Florida before the holidays. This pattern of behavior, coupled with your Florida documentation would clearly establish your Florida property as your legal residence.

How It Affects Taxes

But what does any of this have to do with your taxes? Every state has its own income tax, and every state has a right to tax any income that you earn within its borders. However, only your state of residence has the right to tax all of your income, regardless of what state (or even what country) it was earned in.

So, let’s say you have a business here in Florida, but go to Texas each year to help your parents run their business. When you’re working for them, they pay you a fair wage. Florida would be able to tax not only the income you earn from your business here, but can also tax the income you earn working for your parents in Texas each year. So, all of your earned income would be taxed at 6%, the current state income tax for Florida.

The state that you earn the income in, as already mentioned, can also tax the income you earn in that state. However, since Texas does not have a state income tax, you don’t have to worry about any withholdings from them. (If you earned income in a state that does have an income tax, they would tax you on income you earned there, and Florida would provide you with a credit for taxes already paid.)

With this example, you can see how claiming Texas as your legal domicile would be extremely beneficial, as you wouldn’t have to worry about any income tax on money earned outside of Florida. However, given the patterns of behavior and the documentation described above, it would be more or less impossible to make a case for you being a legal Texas resident.

For those with multiple residences, determining your legal domicile can have major financial implications. So, make sure you pay attention to all the details and work with an expert when establishing your state of residence and calculating your state income tax.