By |December 16th, 2015|Categories: Athletes & High Net Worth Individuals, Tax|

Tax Residency: Which state do you really call home?

Red Brick Colonial Home in WinterFor most of us, the question, “Which state are you living in?” is a fairly easy one. For others, particularly professional athletes and warm weather-loving retirees, it can be difficult to answer.

That’s because these types of individuals—and others who share their somewhat nomadic lifestyles—may split their time across several different states. Determining which state to call “home” can significantly impact the amount of state income tax they owe. And if a state disagrees with their answer, they could ultimately face stiff tax penalties.

So if you identify among those who live within multiple area codes, it’s important to understand how each state determines your residency.

Physical Presence Test vs. Intent Test

Here in Minnesota, the Department of Revenue applies two tests to evaluate your claim of tax residency: the Physical Presence Test and the Intent Test. The Physical Presence Test is, for the most part, straightforward. If you are present in Minnesota for at least 183 days, you are a resident (exceptions do apply, such as for service members). If you don’t qualify as a resident under this test, the Department could still apply the Intent Test, which involves taking a close look at 26 factors to determine your tax residency.

Out of the 26 factors, we have identified those that absolutely must be resolved, along with a few tips for addressing each one, when attempting to change your tax residency from Minnesota to another state. Note: These are general residency factors that will likely apply to your situation in any state.

  • Address – Change the address you use on mail, bank statements and any other documents such as tax returns. (You should not have a Minnesota address.)
  • Voter registration – Make sure you register to vote in your new state, and then actually vote there.
  • Driver’s license – Your current license should be issued by the state in which you are claiming tax residency.
  • Vehicle registration – Any vehicles used outside of Minnesota should be registered in that state. However, if you keep vehicles in Minnesota, be sure to keep them registered here but change the registration to nonresident. If you register a vehicle with another state that is primarily used in Minnesota, you will be in violation of Minnesota law.
  • Insurance – If you have any insurance on property located in Minnesota, be sure to tell your insurance agent that the home is no longer your primary residence. Additionally, you must remove the homestead exemption on the Minnesota home if it is currently listed as a homestead.
  • Hunting and fishing licenses – Change these to a nonresident license. If you have bought an unlimited license, change the address on file with the Minnesota Department of Natural Resources.
  • Tax filings – Continue to file Minnesota tax returns as a nonresident if you have any source of income in Minnesota.

Again, this list of factors is not exhaustive, but it is a good place to start if you wish to change your tax residency, regardless of the state you find yourself in. And with a better understanding of how a state might determine your residency, you can answer questions about where you live with ease.

About the Author: Wade Christensen

Wade Christensen, CPA is a tax partner at Froehling Anderson specializing in working with businesses, professional athletes, and high net worth individuals.