Tax Home: A Cornerstone of Global Tax Compliance
When you are a global taxpayer, it is crucial to understand what a tax home is for you. Knowing your tax home is the first step for tax strategies and compliance. This article focuses on an individual’s tax home in the income tax context.
Tax residency
Many countries and localities have income tax. If you are a tax resident of a place that has income tax, you are subject to such income tax. In the U.S., states and localities have different tax schemes and rates, so the tax residency has a significant impact on one’s tax planning and tax burden/responsibilities. There are two tests for tax residency: (1) the domicile test; (2) the statutory residency test. If one meets conditions under either test in a state, that state will be the person’s tax home.
Domicile Test - What is Domicile and how does it work?
The concept of "Leave and Land" emphasizes the importance of a clean break from your previous tax home. This means a clear and convincing demonstration of your intent to abandon your old residence and establish a new one. Whether it's retirement, a significant lifestyle change, or health-related reasons, the key is to avoid appearing like a typical "snowbird" who merely spends part of the year in a different location. Beware of the "creeping domicile" phenomenon, where unintentional actions or prolonged stays can undermine your efforts to establish a new tax home.
Important things for the domicile test are:
· Home – where is your primary residence?
· Workplace – what is the place of your primary business/work and income source?
· Time – how much time/ how often do you stay in different locations? This is not a bright line 183-day test. Quality of the time spent is just as important.
· Family – Where are your family members?
· “Near and Dear” – what connections do you have to a place, such as family, friends, and communities (including pets!)?
· And other things like:
a. Mailing address
b. Homestead tax credit/exemption
c. Safe deposit box
d. Vehicle registration
e. Voter registration
f. Library card
g. Driver’s license
h. Citations in important legal documents like wills or trusts
These factors are weighed in together and help determine one’s domicile for tax and legal purposes.
Statutory Residency Test - What is it and how does it work?
While your domicile may be one place, but in the U.S., a state could still consider you as a tax resident of that state if you meet a statutory test to be considered a tax resident. Generally, the statutory residency test is based on (1) 183 days – the number of days could be different depending on the state - and (2) the permanent place of abode.
The day count could be evidenced by credit card statements/records, ATM use, personal diary, electronic calendar, flight records, EZ pass, phone records – cell phone logs, records from apps, travel itineraries, etc. The permanent place of abode could be evidenced by proof of ownership, maintenance, registration for government/business services, personal items, access to the property, and so on.
Here a few things that can help in establishing a new place as your domicile:
Obtain a Driver’s License and Register Cars and Boats in the New State.
Buy or Lease Property.
Spend More than 183 Days Per Year in the New State.
Register to Vote in the New State.
File a Declaration of Domicile (if applicable) and get a local library card.
Move Bank Accounts and Safe Deposit Boxes to the New State.
Declare a Change of Address.
Use the New State as a Home Base.
Change Legal Documents to Reflect Residency in the New State.
File Tax Returns in the New State.
Develop Local Affiliations.
If it exists, apply for a Homestead Exemption in the New State.
(Please note the above are just examples, it is important to consult with a good advisor especially if your situation is unique!)
Still have questions about your tax residency and domicile? Contact me today for personalized advice.
