You split your time between two states. Which one taxes you?
Part of an October series on who gets to tax you. This post goes deeper on the personal side of Who taxes what you earn?
You can split your time between two states. You can't split your residency. For tax purposes, you have one home state, and it can tax everything you earn. The other state can still tax you, and if you're not careful, it can tax you on everything too.
Here's a version of a question I got recently. A client has lived in her New Jersey house for years. She also owns a place in Florida, and that's where she's making her permanent home. She already has her Florida driver's license. Her plan is to sell the New Jersey house, add a room onto her daughter's house in New Jersey, and split her year between the two states. So which state does she pay taxes to?
Florida has no personal income tax, so for her the real question is how much of her income New Jersey gets to tax. That depends on three things: where she's domiciled, how many days she spends in New Jersey, and where her income comes from.
You get one domicile
Domicile is your one permanent home, the place you intend to return to. You can have homes in several states, but only one domicile, and that state can tax all of your income, wherever it's earned.
You keep your old domicile until you've established a new one, and the burden of proving the change is on you. High-tax states audit these moves, and they tend to start with people who kept a foothold behind.
What a state looks at
Domicile is about intent, but states don't take your word for it. They judge it by what you do:
where you spend your time
which home is bigger and more lived-in
where your work and business are based
where your family is
your driver's license, car registration, and voter registration
the address you file taxes from
where your doctors, banks, and memberships are
whether you're still claiming a property tax break meant for the state's residents
My client's Florida license is real evidence of intent, and intent is where a change of domicile starts. But a license is the easiest thing on that list to change, so on its own it carries little weight. Once she's actually living in Florida and the rest of her records follow, Florida is her domicile. Until then, New Jersey has a strong argument that she never left.
The 183-day rule can make you a resident of both
This part surprises people. A state can tax you as a resident even if you're domiciled somewhere else. New Jersey does it if you keep a permanent place to live in the state and spend more than 183 days there during the year. If you meet that test, New Jersey taxes you as though you'd been domiciled there all year, on all of your income. Many states have a similar rule, sometimes with a different day count.
That's the risk in my client's plan. A room of her own at her daughter's house, kept available year-round, could count as a permanent place to live. If her New Jersey days cross the line, she owes New Jersey resident tax on everything, even with her Florida domicile fully in place.
The fix is simple and tedious: count your days. Any part of a day in the state generally counts as a full day. Keep a calendar. In an audit, the state can pull phone records, credit card and bank statements, and toll records to rebuild your days on its own, so your count needs to match theirs.
What New Jersey taxes even if you're not a resident
Stay under the line and New Jersey treats you as a nonresident. That doesn't mean it taxes nothing. Nonresidents still owe New Jersey tax on income from New Jersey sources, such as:
rent from New Jersey property
pay for work you do while you're in New Jersey
gain when you sell New Jersey real estate
That last one comes due at closing. A nonresident selling New Jersey property generally has to make an estimated tax payment at closing unless an exemption applies. Selling a home you've used as your principal residence is one of those exemptions, but the exemption is written for property used exclusively as a principal residence. If you rent the house out before you sell, don't count on it.
The same facts get asked different questions by different agencies. It's the point from registration, licensing, and tax nexus are three different questions, applied to you instead of your business.
The year you move
In the year you change domicile, you're a part-year resident. New Jersey taxes everything you earn while you're a resident, and only New Jersey-source income after you leave. File that final part-year return. Its date is part of your proof of when you left.
Where the IRS comes in
The IRS doesn't care which state you live in. Your federal return comes out the same either way. It cares about one related question: which home is your main home when you sell. The exclusion of up to $250,000 of gain ($500,000 for married couples filing jointly) only applies to a home that was your main home for at least two of the five years before the sale.
My client's CPA asked whether she needs a New Jersey license again for the exclusion to work. She doesn't. If you alternate between two homes, the one you're in most of the year is ordinarily your main home. Beyond that, the regulations point to other facts:
where you work
where your family lives
the address on your federal and state tax returns
your driver's license, car registration, and voter registration
your mailing address for bills and correspondence
where you bank
where your place of worship and your clubs are
The exclusion looks back at the years she actually lived in the New Jersey house, and she lived there full-time. What she needs is proof of those years: old tax returns with the New Jersey address, utility bills, and other records showing she lived there. Going back to a New Jersey license wouldn't add anything to that. It would also muddy the record for her move to Florida.
Make the paper trail match your life
If you're changing states, move everything, not just the license:
driver's license and car registration
voter registration
the address on your tax returns, plus a final part-year return in the old state
banks, doctors, and your mailing address
a declaration of domicile, if your new state offers one. In Florida it's optional, recorded with the clerk of the circuit court in your county.
homestead, if your new state offers it. In Florida, the home has to be your permanent residence as of January 1, and the application is due March 1.
Watch for the item that pulls the other way. If you claim a homestead exemption in your new state while you're still living in your old one, and you also tell the IRS the old house is your main home, you're telling two stories that can't both be true. Pick one and line everything up behind it.
And if you own a business, moving yourself doesn't move your company. Moving your LLC to another state covers that separately.
So split your time if that's the life you want. Just decide which state is home, keep your days on the right side of the line, and make every record say the same thing.
Keep reading: Virtual addresses: where they work and where they don't; Do I have to register in a state just because I bank there?; and Moving your LLC to another state.
Next in the series, Tuesday, October 13: Who taxes what you own?
This is general information, not legal advice for your situation. If you want an answer for your situation, book a consultation.
