The Ins and Outs of Establishing a Domicile in the U.S. or Abroad
If you have a hometown residence but spend more than half your time at your vacation getaway in the U.S. or abroad, are you following the tax-related rules for establishing a domicile? Here are some answers to common questions on the topic.
Q: Is There a Difference Between a Domicile and a Residence?
A: Yes. To many people, “domicile” and “residence” mean the same thing. But if you’re thinking about relocating to a more attractive income tax state, which requires that you establish your domicile there to take advantage of certain tax benefits, it’s important to understand the subtle yet key differences between the two.
A domicile is your permanent home. You may not be living there now, but you still own the home and intend to reside there again. As such, it is your tax jurisdiction, meaning you are subject to the tax laws of that state. A residence, on the other hand, is a place you choose to live temporarily. You can have several residences but only one domicile.
Q: How Do I Establish My New Domicile?
A: The requirements for establishing a new domicile can vary from state to state. Some (but not all) of the steps you should take include:
- Change your mailing address with the U.S. Postal Service
- Change your address on your bank, savings, credit card, mortgage and investment accounts as well as your insurance policies and will
- Obtain a driver’s license in your new domicile state
- Update your voter and car registrations
- File a final income tax return in your former state before relocating and a resident income tax return in your new domicile state, if required
- Other seemingly small considerations include finding a physician in your new domicile state, changing your gym membership and moving your pet to your new domicile
Q: Can I Avoid a Residency Audit by My Former State?
A: Possibly. Residency audits can be time consuming and potentially expensive if the tax authorities in your previous state decide that you’re still domiciled there. You can’t prevent being audited, but you can reduce the risk by severing all legal ties with your former state, starting with the partial list of steps outlined above. Doing so reinforces your intention to make your new state your permanent domicile.
If you’re the target of an audit, the burden of proof is on you to demonstrate that you have legally changed your domicile. It’s critical to carefully document every step you’ve taken to prove your intention to make your new state your official domicile. It may also be a good idea to keep a log to record how many days you spend in each location. Most states have a three-year window after you move to initiate an audit, so be sure to retain copies of all your documentation so it can be easily accessed if needed.
Q: I’m Thinking About Moving Abroad for Tax Reasons. What Do I Need to Know?
A: If relocating to another country sounds appealing, you’ll first want to understand the residency and domicile requirements of your state and the things that may imply continued residency, such as spending more than half of the year in the state, continuing to own or maintain a home there and keeping a driver’s license, voter registration and mailing address in the state. As mentioned previously, the laws governing this issue can be complex and often vary from state to state.
Also, keep in mind that residency doesn’t matter for federal tax purposes. The U.S. government taxes every U.S. citizen on their “worldwide” income, regardless of where they live. Ultimately, unless you relinquish both your U.S. citizenship and your domicile, you’ll still owe federal taxes to the IRS.
Q: I’m Relocating Overseas for Work. How Do I Establish Foreign Residency?
A: Establishing residency in another country comes with many tax benefits, particularly at the federal level. To take advantage of one of the most beneficial tax laws governing expats, called the foreign earned income exclusion and foreign housing exclusion/deduction, you first must pass either the:
- Physical presence test – You need to be in one or more foreign countries for a total of 330 full days for 12 consecutive months or
- Bona fide residence test – You must live in another country for a full calendar year.
The IRS uses these measures to determine whether you spent enough time in another country to qualify as a resident for tax purposes.
Before You Move
Relocating to another state—or another country—takes careful planning. When you’re a client of Mariner Wealth Advisors, we can run various scenarios and help evaluate the overall cost of living in your new state or country before you move.
This article is provided for informational and educational purposes only, and the views expressed do not take into account any individual personal financial, legal, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment, tax advice, or a solicitation to or recommendation to engage in any strategy mentioned. The information provided and any opinions expressed are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy or completeness of the information. Please seek advice from qualified tax, legal, and financial professionals regarding your personal situation.
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