Establishing residency for income tax purposes

2
5462
The rules to establish residency for state income tax purposes vary by state.
Establishing residency for state income tax purposes can be tricky. Each state is different.

A reader writes in:

“I’m a Nevada resident, but I love California, and most of my family is there as well. I’ll be retiring soon and I’d like to live there part of the year, but rent a home here in Nevada where I’ll also spend part of the year. Will I need to pay California state income tax?

Great question! Since California’s income tax stretches from as little as 1% to as high as 13.3% – this can be a financially crucial one as well.

7 states currently have no income tax. They are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If you’re a resident of one of those states – or want to establish residency – you need to pay special attention to the tax laws.

Establishing residency for tax purposes is a state by state issue. The laws of California are different than they are for Nevada, or any other state. If you don’t play by the rules, you may be subject to state tax penalties and interest. These can amount to tens of thousand – even hundreds of thousands of dollars!

 

Residency vs domicile

The rules to establish residency for state income tax purposes vary by state.
Establishing residency for state income tax purposes can be tricky. Each state is different.

The first thing to consider is your resident status versus your state of domicile. Residency varies from state to state. Being in a state physically is the main residency test. Owning a home, family location, and financial interests are other factors which help determine residency.

Domicile and residency are often used interchangeably. They’re different however. Residency is simply where you stay. Domicile is your permanent place of residence, or where you ultimately call home. Where your family is located plays a large part in determining domicile.

You can stay in multiple places giving you residency in multiple places. Conversely, you can only have one domicile.

For tax purposes, most states consider some form of domicile. If your permanent home is in California, you’re considered domiciled there. Every state is different however, so you’ll need to research your own states residency and domicile requirements.

 

California residency status for tax purposes

Rules to establish residency for income tax purposes are tricky.
California requires you to pay state income tax even if you’re a part time resident.

In California, you’re considered a resident if:

  • You’re in California for other than a temporary or transitory purpose
  • You’re domiciled in California, but staying outside CA for a temporary or transitory purpose

California defines three classes of individuals:

  • California residents – You’re taxed on ALL income no matter where you earn it.
  • Nonresidents – Taxed ONLY on income you earn in California.
  • Part-Year residents – You’re taxed on ALL INCOME received while you’re a resident of California. For periods of time you’re not in California, California would only tax income from sources within California.

 

Nevada residency for income tax purposes

Nevada’s constitution states that no income tax will be levied on residents. As such, Nevada rules aren’t nearly as defined as states with an income tax. Nevada residency rules simply state that legal residence requires physical presence during the period for which residency is claimed.

Domicile is interesting in Nevada. You can actually file a sworn statement with the district court in your county. They call this a “declaration of domicile”. You must present evidence of residency and your intent to make it permanent within the state of Nevada.

 

In reality, residency for tax purposes is determined by…

In practical terms, residency (rather your domicile depending on your state laws) is determined by your true intent to live in a state. This intent can be proved by things such as:

  • In what state are you registered to vote?
  • What state issued your drivers license?
  • Where is your vehicle registered?
  • Where does your family live?
  • Where do you own your home?
  • Where do your kids go to school?
  • Where are your financial interests located?
  • Have you applied for any governmental programs, tax breaks, or privileges and in which state?

Those things – in large part – will determine in which state(s) you’ll need to pay income tax.

 

My take on your question, dear reader

Where will you maintain your drivers license and vehicle registration? If you’re living in Nevada most of the year, I assume you’d maintain those things in Nevada. I also assume you’ll have a place to live here – rented or owned – for the entire year.

Assuming you also are registered to vote in Nevada, it seems your official domicile would be Nevada for tax purposes. That being said, pay special attention to the “part-year resident” status under California law. If you’re a resident of California even part of the year, they require you to file California long form 540nr.

So if you’re spending a few weeks a year with friends and family, that’s a vacation. If you’re living there more than that, you may very well be on the hook for whatever income you earn during the period of time you’re there.

Contact a qualified accounting firm in Nevada where you plan on filing. Gerety and Associates is one such firm. Gilmore & Gilmore is another. It’s better to be safe than rack up years of penalties and interest, only to find out California claimed you as a resident and you owe them state income tax.

2 COMMENTS

  1. OK, I get the California vs Nevada problem but mine is different. My wife was born in NV and we moved back there several years ago for a period of four years. We then sold our house there and obtained a 10 year “resident” visa in France which still has a few years left. We have a bank account, drivers license, and vote in NV. WE HAVE dentist, friends, in NV and believe we will return there later. Are we still NV residents?

    • I can’t give you a definitive answer unfortunately, there are too many grey areas for most situations. I would ask the CA State tax board directly, but I would assume if you vote here, have a DL here in NV, and financial affairs here that would go a long way – If you have a residence in CA however, I can’t give you a solid answer. In the end, it’s the CA state tax board that would make the call.

LEAVE A REPLY

Please enter your comment!
Please enter your name here