In today’s digital world, some people, especially traders, can operate their economic activities while traveling around the U.S. and the world. The issue arises when some states continue to subject individuals to resident taxation until they change their domicile. Historically, in an inter-state move, a family’s domicile changed on the moving date. However, as individuals now travel for extended periods without establishing a new permanent home, the concept of domicile becomes more complicated.
When a family moves out of a state but does not establish a new permanent home for months or even years, the state may still consider them a part-year resident until they officially move into their new home. The requirement of a new permanent home for a change of domicile may seem unreasonable as some individuals continue to travel without settling in one location. This poses challenges when dealing with domicile and tax residency rules, which vary by state and involve both subjective and objective tests.
New York State domicile rules require individuals to complete a move with a change of domicile, including establishing a new permanent home in a new state or country. Many individuals assume that moving out of the state is enough to stop owing resident taxes, but NYS requires a clear and convincing change of domicile. State tax auditors focus on enforcing residency rules, and individuals may face challenges if they do not meet the requirements for changing domicile.
There are exceptions to the NYS domicile rules, including the 30-day test and the 548-day test for time spent traveling outside the U.S. These tests have specific requirements for individuals to be considered nonresidents for tax purposes. Some individuals, such as traders and hedge fund employees, have moved from high-tax states to states with no income tax, like Florida, in recent years. However, they must meet the requirements for changing domicile to avoid being subject to resident taxation.
State domicile rules are complex and involve subjective factors such as family connections and closer relationships, in addition to objective formalities like voting and licenses. Many individuals may over-rely on these formalities and not consider the subjective factors when determining their domicile. Relying on antiquated domicile rules, crafted before modern technologies and working methods, can lead to unfair tax treatment for individuals who are traveling or working remotely. It is essential for individuals to understand the rules for changing domicile in their state and ensure they meet the requirements to avoid potential tax issues.
