Resident status and state taxes

As states continue to be under financial pressure, they are looking for ways to make sure that each resident is paying their fair share of income taxes. As a result, state tax audits challenging domiciles and places of business are on the rise. This applies to people who spend a significant amount of time out of state and those who earn income while performing their trade or business in other states.

The most common group of people who spend a lot of time out of state is snowbirds, who frequent places like Florida or Arizona for the colder months, and sooner or later consider making their winter destination their permanent residence. Often the desire to avoid state income and/or estate taxes in their former home state is a major factor in the decision process. In Massachusetts, the migratory route to Florida is well populated with retirees who eventually learn the rules about what it takes to be a permanent Florida resident.

The answer is fairly easy: You need to spend six months and a day in your "permanent" resident state, as shown by your driver's license and voter registration. The audit process to test your state of domicile is very easy. An auditor will look at a few things that you may not have considered. They'll look at ATM withdrawals, restaurant and credit card charges, telephone usage and other electronic transaction methods.

The six months-and-a-day rule doesn't mean that you are quarantined in the snowbird state just to prove that you are a permanent resident of that state. Vacations or business travel from your snowbird destination may count as time in your resident snowbird state. I wouldn't count a two-month trip to Boston from Thanksgiving through early January a temporary visit; that feels more like living away from the snowbird state.

But a short trip to visit family in your former home state for the holidays, even if it may be your summer or second home, may still be considered merely a visit from your home state. Of course, this is a gray area where prudence and the advice of a tax professional can help you make a better decision.

If you offer services or sell goods in other states, you may also be exposed to taxation in those jurisdictions. Check with your tax professional to ask if your activities leave you exposed in any other states.


John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth


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