Choosing your domicile state has income tax implications

Q. I intend to take part-time residence in a state that has no state income taxes. What is meant by establishing a domicile state and what is my liability for state income taxes?

A You do need to provide proof that this is your domicile state where you will maintain your legal residence. Domicile is determined by intent, rather than by the length of time you spend in a state. You may establish a state as your domicile the first moment you occupy property there, provided your intent is to return there if you go away. You have only one domicile, although you may have more than one home.

For example, Fred, who lives in New Mexico, takes a new job in Arizona. He establishes a temporary residence there until the end of the school year when his wife and children will join him. Although he maintains homes in both Arizona and New Mexico, he decides to keep New Mexico as his state of domicile until his family relocates to join him. At that point he'll call Arizona his state of domicile.

In another example, Frank changes his state of domicile from Massachusetts, a state with income taxes, to New Hampshire, a state without income taxes. He prepares to convince the Massachusetts Department of Revenue, if called upon, that he has made a legitimate change of domicile by renting a home in New Hampshire, getting a driver's license and registering his car there, and also registering to vote there.

Definitions

Domicile, also called your "state of legal residence," is your true, fixed, and permanent home. It is the place to which you intend to return if you are away.

For example, Jane relocates from Atlanta to Boston to attend graduate school. She intends to return to Atlanta when her education is complete. Georgia is her state of domicile. Even if Jane remains in Boston for many years earning several advanced degrees, Georgia is her state of domicile for the entire period as long as she intends to return there.

Suppose, while living in Boston, Jane decides she won't return to Atlanta but would like to make Vermont her state of domicile. She would have to travel to Vermont and have the appropriate mental intent while physically present there.

Tip: If you're a statutory resident of one state and claim another state as your domicile, your state of domicile may require you to file a tax return there as well.

Why is your domicile important?

Your domicile is important because it affects the following:

Determining your domicile

You must meet the following requirements to claim a state as your domicile:

If you're a naturalized citizen, your domicile is usually the state where you became a citizen, unless you marry a citizen domiciled in another state.