Determining Your Legal Domicile, and How It Impacts Your Taxes

03 Jun Determining Your Legal Domicile, and How It Impacts Your Taxes

For the majority of people, determining what state your legal domicile is in is really quite simple; it’s the one home that you own or rent, and your only residence. Because this is so straightforward for most people, very few individuals put much thought into it. However, if you have two or more homes located in different states, the issue can become much more complicated. Let’s take a look at how your legal domicile is determined, how you can prove your domicile, and how this can impact your taxes.

It’s about Intent

Interestingly enough, your domicile is legally determined based on the time spent in each state and your intent, rather than solely on the amount of time you live in a particular residence. Your domicile is your principal residence that you intend to return to and remain in, potentially regardless of temporary habitation in another location.

However, since nobody really knows your intent but you, it is up to you to provide some proof as to your true intentions regarding your multiple residences. And, because individuals have been known to lie about their domicile in order to benefit from lower income tax rates (we’ll get to that later), it ultimately falls to a judge, revenue agent, or other third-party individual to determine your true intent.

So, if your domicile is determined based on intent, and not only the time spent in the residence, how can you prove your intent to establish your domicile?

Providing Proper Proof

Proving your intent is going to be largely based on certain documents, as well as your patterns of behavior in relation to your residences. So, as an example, let’s say you have a home in Utah, and a condo in Texas. Most years, you spend your spring and summer in Texas, and live in Utah during the fall and winter, splitting your time almost evenly between the two states.

However, there are some years that you stay in Utah during the spring. And, any time you are not using your Texas condo, you rent it out; the Utah home, however, remains uninhabited while you are away. This establishes a pattern: While you may spend half of most years in Texas, it is to your Utah home that you regularly return.

As far as documentation goes, your cars are all registered in Utah, and you and your spouse both have Utah driver’s licenses. You are also both registered to vote in Utah. In most cases, this amount of documentation, coupled with the pattern described above, would be considered sufficient evidence to prove your Utah home as your legal domicile.

Why Does It Matter?

So, why does all of this matter? From a tax standpoint, clearly establishing your state of domicile can have a huge impact on you financially. When your income is taxed, your state of residence will typically tax all of the income you earn, whether or not it was earned in that state—or even in the US!, then provides a credit for tax paid to other states. Non-resident states, however, typically only tax the income that you earn in that particular state.

In the example mentioned above, let’s say that you maintain a second residence in Texas because that is where your parents live. Every summer, you go there to work for the family business. As someone domiciled in Utah, all of your income—even the income you earn while living in Texas—is taxed at 4.95% (currently). The state where you earned the income would also have the right to take taxes from your earnings; however, since Texas has no state income tax, you would be safe from additional withholdings in this case.

Now, in the circumstances described above, you can see why it would be beneficial to claim Texas as your state of domicile; all that money you make every summer would be free from any income tax, rather than having Utah taking a cut of it. However, because of the pattern of behavior and the evidence mentioned in the previous section, you would be hard-pressed to prove your Texas condo as your domicile.

For this reason, it’s important that you pay close attention to the details, and ensure you have a wealth of evidence to prove your intent and establish your domicile properly. If you have any questions about establishing your domicile or how it can impact your taxes, please reach out to The Accounting Guys and speak to our state and local tax experts in Provo.