Determining State Tax Residency

By Nathan Alexander, CPA, CFA(R)

As many of our clients split time living between multiple states, we thought it would be useful to provide some basic context for the complex topic of state income tax residency. It’s extremely important for those who spend time in more than one state to periodically check in with a qualified tax advisor who is familiar with these nuances to see if there are planning opportunities to either reduce tax exposure or bolster audit defense.

Statutory residents are people who spend more than 183 days physically present within a state, regardless of whether they consider that to be their home state. Consider, for example, a couple who lives in Vermont and Florida, but has considered Florida to be their home state for many years. They typically spend four months in Vermont and eight months in Florida. However, due to various circumstances, in 2023 they spent seven months in Vermont and five months in Florida. They exceeded 183 days in Vermont in 2023, and therefore are statutory residents of Vermont for 2023, and all their income is taxed by Vermont as if they were residents simply because this is the state where they spent most of their time. Worst still, the burden of proof is on the taxpayers to prove where they spent their time, so the Vermont Department of Taxes need only mail a basic questionnaire asking for detailed evidence which will be cumbersome to compile. A personal diary or calendar is not sufficient. Statutory residency audit cases are not especially time-intensive for the state tax department and can often catch taxpayers off guard when they consider their tax home to be somewhere else, but simply tripped this 183-day test in one particular year. To make it overly simplistic, anyone who spends most of their year in a state is generally a statutory resident of that state and needs to be prepared to pay all income taxes just as if they were a resident.

While statutory residency may drive income taxation simply based on where you spend your time, there is also the concept of “domicile” to consider. Your domicile is where you intend to make your tax home. It is generally determined based on five factors:

Factor 1 TIME: Where you spend your time—just like in the statutory residency example above, a person that spends seven months in Vermont and five months in Florida would (for the purposes of this factor) be a resident of Vermont. This is why it is so important to keep good records in real time: to be able to see a shifting trend toward a state that the taxpayer may not actually consider their tax home.

Factor 2 INCOME: Where you earn your income—this is more straightforward when a person is still working, but quickly becomes less clear for people who work remotely or have retired. For taxpayers who are fully retired and living on passive investments, this

factor would likely neither help them nor hurt them in a domicile audit.

Factor 3 FAMILY: Generally, the state closest to your children or immediate family (which every state evaluates differently) would be your state of domicile under this factor.

Factor 4 HOME RESIDENCE: Of two homes, generally the location of the grander, or larger, or more valuable property would weigh in favor of that state as the owner’s domicile.

Factor 5 NEAR AND DEAR PERSONAL PROPERTY: Where you keep your most valuable personal effects is a final factor in determining your domicile. 

In addition to the five factors, there are tiebreaker tests, which all too often folks consider to be the most important of all, when in fact, these are only used if the standard five factors are inconclusive. Tiebreakers include looking at where the taxpayer is registered to vote, makes charitable donations, maintains community or religious ties or contributes community service.

Here is a hypothetical example to illuminate the concept of domicile:

• Sam and Betty lived in Vermont for the last 30 years, but they fully retired from their jobs in July 2022 and now support themselves with social security and investment income.
• They own a home in Vermont presently, valued at $1 million, and a condominium in Florida valued at $700,000 that they have owned for many years.
• They have two children, a daughter living in Vermont with her family, their grandchildren, and a son who lives in Boston and is unmarried and without children.
• They have no notable personal property such as valuable artwork, but Sam restored a classic automobile, which he keeps in Vermont and only occasionally uses in nice weather.
• Day count:
  • In 2021 they spent 230 VT, 88 FL, 47 other traveling
  • In 2022 they spent 165 VT, 159 FL, 41 other traveling
  • In 2023 they spent 148 VT, 206 FL, 11 other traveling- 
    They change to FL Domicile in this year and stop paying VT income taxes
    
  • In 2024 they spent 159 VT, 196 FL, 10 other traveling

Prior to 2022, it was clear they were living and working in Vermont and domiciled in Vermont. However, their shift towards more time in Florida was gradual, and they did not sell their Vermont home and fully move to Florida, so the factors must be evaluated to see when a domicile shift in favor of Florida could be justified. Let us examine 2023 in more detail and see which test favors which state:

Factor 1 FL: For 2023 they could document 206 days in Florida, and that day count was perpetually growing in favor of Florida, while Vermont days were decreasing. That is a helpful trend favoring Florida argument for domicile.

Factor 2 NO HELP: The income test does not favor VT or FL since their income is all passive retirement, so this factor does not help either case.

Factor 3 VT: With a child and grandchildren residing in Vermont, this test will favor Vermont.

Factor 4 NO HELP: The homes are roughly comparable, and while Vermont is more valuable, it might not be well suited as they age in retirement due to layout, so at best this home test is no help, and at worst it favors Vermont.

Factor 5 VT OR NO HELP: With only basic personal property and no other major valuable items, it would be argued by the Tax Department that the classic car is a valuable item which is garaged in Vermont and favors Vermont.

Unfortunately for Sam and Betty, they focused their tax filing changes purely on the day count in 2023 favoring Florida, but failed to see how each test of domicile is important. With the income test not helpful, and perhaps the personal property test also thrown out, they would prevail in day count but not prevail in family test and possibly home test and would not be able to justify a Florida tax domicile shift. Remember that the burden of proof is on the taxpayer changing domicile, so that in this case Sam and Betty must demonstrate upon audit, with evidence, the outcome of each of these tests, and it is unclear their Florida tax status in 2023 would stand.

As you can see, state income tax rules as they pertain to domicile are complex and should be considered well in advance of making any tax filing changes to be sure the updated state tax status would be sustained on audit. We here at Trust Company of Vermont are happy to discuss and help guide you to resources that may help you prepare for such changes and have confidence in the state tax returns you file in the future.