How to Determine Your Legal Domicile and How It Affects Your Taxes
The majority of Americans have a single residence, so determining their legal domicile isn’t really something they have to think about; your state of residence is where you live, and that’s all there is to it. But for those who have two or more homes located in different states, determining your legal residence can be a bit more complicated—and your state of residence can significantly impact your taxes too. Here’s what you need to know about determining your legal domicile and how that determination will affect your taxes.
Time and Intent
When determining your legal domicile, there are two factors that really matter: the time you spend in each residence and, interestingly enough, your intent. Your domicile is the primary residence that you intend to remain in and continue to return to, regardless of temporarily living in another residence.
Of course, the IRS is unlikely to take you at your word in regards to what your true intent is. So, you’ll have to provide proof regarding your true intentions in relation to your multiple residences. Then, the final decision will fall to a third party, such as a judge or revenue agent, to determine what your true intent and, therefore, your legal domicile are.
So, how exactly can you prove your intent in these cases? Keep reading to find out.
What Qualifies as Proof?
Proof in regards to your intent with your multiple residences is primarily based on documentation and your own patterns of behavior. For example, let’s say you have a home in Florida and a townhouse in California. Most year’s you spend the spring and summer in Florida, and the fall and winter in California. This divides your time almost evenly between the two states, so time spent in each residence alone is not sufficient to prove your legal domicile.
However, there are some years that you stay in Florida through the fall. And, when you’re not using your townhouse in California, you list it as a vacation rental; however, your Florida home is exclusively yours and remains uninhabited while you’re gone. This establishes a clear pattern of behavior. While your time may be equally divided between the two states for most years, your Florida home is the one that you consistently return to and maintain as your primary residence.
But what about documentation? If the majority of your legal documents (car registration, driver’s licenses, voter registration, etc.) are in Florida, this also indicates that Florida is your state of residence. Between these documents and the pattern of behavior outlined above, it’s quite clear that Florida is your legal domicile.
Why Does This Matter?
Now, why does your legal domicile matter so much? As mentioned above, your state of residence has a direct impact on how your income is taxed. Each state has its own income tax, and those rates can vary greatly. When your income is taxed, your legal state of residence will tax all of your income, even if you didn’t earn all of that income within your state of residence. (In fact, even income earned in another country can be taxed by your state of residence.) Your state will also usually provide you with a credit for any tax you paid to other states for income earned there. Non-resident states only tax the income that you earn within that state’s borders.
So, let’s continue with the example we outlined in the previous section. Let’s say that you maintain your second residence in California because you have a family business there. You go in the fall and winter to help run the family business, and earn an income while you’re there. As someone domiciled in Florida, all of the income you earn—both in Florida and in California—is taxed at 6% (currently). But California also has a right to take taxes from what you earn while in that state; so, your income from your family business would be taxed at 7.25%, and Florida would provide you with a tax credit for the income tax paid to that state.
As you can see, claiming Florida as your legal domicile has the benefit of all of your income taxed at a lower rate by the state; and, in the examples above, the pattern of behavior and documentation support this claim. However, if the example were reversed, the individual would have a difficult time claiming Florida as their legal domicile simply to avoid California’s higher state income tax.
If you have multiple residences, it’s important to pay close attention to the details and ensure you have plenty of evidence to prove your intent and establish your legal domicile. If you have further questions about determining your domicile and how it impacts your income taxes, contact one of our tax experts today.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174