The so-called "teddy bear test" is only one part of re-establishing domicile.
Moving from one state to another brings all sorts of opportunities: new scenery to enjoy, new friends to meet and, if you’re lucky, a smaller tax bill to pay. But successfully bidding a high-tax state farewell often means taking care to document your breakup.
Many high-tax states find it hard to say goodbye to residents who depart for greener, or at least more lightly taxed, pastures. New York and California, especially, have long cultivated a reputation for not letting go. But the situation has become more acute in the past year or so, following the passage of the Tax Cuts and Jobs Act of 2017. One of the law’s provisions limited the amount of state and local taxes residents could deduct on their federal income tax return.
For residents who had been thinking about decamping, or who already had homes in more than one state, the SALT cap may have increased their motivation to cut ties with their high-tax home states. High-tax states, in turn, have every motivation to argue that their former residents are, in reality, residents who still owe tax.
Residency and domicile are related but separate tax concepts, both of which are important when it comes to state taxes. An individual taxpayer may be a resident of more than one state in a given year, but he or she can only be domiciled in one. Your domicile is your main home, the place you intend to live permanently and where you return after traveling. You are automatically a resident in the state where you are domiciled, which means that high-tax states are motivated assert that affluent individuals remain domiciled there; proving – or disproving – statutory residency is often much more straightforward. The burden of proof for establishing a new domicile typically rests with the taxpayer.
Changing your domicile involves both cutting old ties and establishing new ones. Depending on your lifestyle, these actions may take various forms. If you are moving entirely from state A to state B, a brisk, well-documented moving process is your best chance of avoiding a dispute with state A’s tax authorities. You should save dated moving receipts, copies of your lease or closing documents on a new residence, and any other supporting evidence that will allow you to establish the timeline of your move. Notify your former state’s tax authorities of your move as soon as possible and renounce any homestead exemption you might have claimed there.
The situation becomes more complex for people who spend substantial amounts of time in multiple places during the year. Creating a paper trail is vital if you retain property in or ties to your old state. No one test alone can establish domicile, but taxpayers can take multiple steps to make their overall intentions clear. These include updating your mailing address, especially for financial accounts and bills; transferring your voter registration and voting in your new home state; transferring your driver’s license and vehicle registration; establishing memberships to religious institutions, professional organizations or clubs in your new state; and selecting a doctor, accountant or lawyer in your new location. Documenting these actions and others can serve as evidence that you really have relocated, even if you occasionally visit your old state for family or business reasons.
Part of what makes this process complicated is that domicile is inherently subjective. As Barry Horowitz, a partner at accounting firm WithumSmith+Brown, told CNBC, “It’s about proving where you really live, where your heart is.” Thus the “teddy bear test”: Where do you keep your keepsakes and sentimental items, such as photographs, collectibles, wedding albums and the like? If you have a pet, your domicile argument is likely to be stronger in the state where that pet lives. However, like any other aspect of domicile, the location of pets or sentimental items isn’t conclusive. Thomas Campaniello kept a variety of valuable and sentimental items in Florida, but his business and family ties remained in New York. New York was also where he received mail, saw doctors and dentists, and kept most of his clothes. As a result, he lost the case when New York challenged his claim that he was domiciled in Florida.
Auditors have also taken advantage of technology in recent years when attempting to determine residency. In addition to long-standing techniques like reviewing a taxpayer’s travel schedule or credit card bills, New York state auditors now may track cellphone records or review social media feeds. They may also consult dentist or veterinary records, CNBC reported, on the grounds that people might travel out of state for specialized medical treatment but that dental or vet field trips are less likely. Some New York auditors reportedly have conducted in-home inspections that included checking out fridge contents, though it is worth bearing in mind that nobody is obligated to allow an auditor in the door, or even to talk directly to an auditor at all.
Taxpayers hoping to support an argument that they truly have relocated from New York to Florida or Texas also may want to turn to technology to bolster their claims. The Wall Street Journal recently reported on apps that automatically track the owner’s location and can issue alerts if users are approaching a state’s threshold for residency. Users should bear in mind that these apps aren’t foolproof, however, and shouldn’t rely on them for a positive outcome on an audit. Auditors are aware of the fact that taxpayers could load the app on a phone and then leave that phone in the state where they want to claim domicile, taking a second phone when they traveled back to their original state. So while these apps can be helpful, the real problem for most taxpayers is not simply how to count days in a given location (though you should do so in whatever way works for you). Given the subjective nature of domicile, tracking your location during the year is only one piece of a larger puzzle.
New York wins more than half of its tax residency audits. Some of these may indeed be individuals trying to cheat the system, but I suspect many are taxpayers who simply did not take sufficient care in documenting their lifestyle or who faced especially complex situations. For instance, couples who split their residency across state lines may face an uphill battle in establishing separate domiciles, especially if the states have very different tax regimes. While there is no surefire way to convince the tax authorities that you have left New York or another high-tax state behind, creating a big-picture case with a variety of concrete evidence can only work in your favor.
Technology has not changed the fact that the most important step in changing your domicile is documenting evidence to support your position. The more work and effort you put into demonstrating that you really have moved your domicile, the better your odds that it will be an open-and-shut case when the tax authorities come calling.