Domicile vs. Tax Residency: What Is Domicile and How Do You Change It?

What is a domicile, and what is a residency?

As a CPA and financial advisor, clients often ask me for ways to reduce taxes. Since the enactment of the Tax Cuts and Jobs Act of 2017, which limited state and local tax deductions to $10,000, many clients, particularly residents of high-tax states such as New Jersey, New York, and Connecticut, have raised the question specifically about changing their resident state and what is needed to achieve their goal. My response, and the short answer, is consistent: The move must be real and intended to change the location of the place you call home.

The long answer is that it is not always that simple, especially if you want to hold on to real estate in your prior home state. However, the distinction of domicile versus residency begins the critical path that determines a person’s tax home for income and estate tax purposes. Residency, on the other hand, is a legal concept that drives the assessment of only income tax.

What are the differences between residency and domicile rules?

Many states look to a person’s domicile to determine residency. An individual generally has only one domicile, which is the place considered the true home and where the individual intends to return to when away. Although an individual may have more than one residence (i.e., a place where the individual is present from time to time), it is critical that they solidify in the eyes of the state one domicile for estate tax purposes. Due to differences in state rules, an individual may be held to have more than one domicile or true home (see the 1935 U.S. Supreme Court case Hill v. Martin, 296 U.S. 393). The unfortunate consequence of such a situation is that two states can constitutionally tax the estate of the same individual as a domicile, so long as all the death taxes do not exceed the estate’s total value.

How do states determine a person’s domicile?

A state’s determination of a person’s domicile is a question of fact, with no single fact being conclusive.  Furthermore, the term “domicile” is not interchangeable with “residence” in all situations. By contrast, a domicile is intended to be permanent rather than temporary, whereas a residence means living in a particular locality and requires mere physical presence. Although domicile requires residence, residence alone does not establish the intent to remain permanently, which is necessary for domicile.

Domicile is generally established by extrinsic evidence of intent, as a person’s intent is otherwise impossible to prove. For example, a New York court stated:

“The law is well settled and well understood as to just what must be proven to establish domicile within any particular jurisdiction. While much has been written on the subject and different words and phraseology appear in court opinions, the ultimate result is always the same, i.e., domicile is residence coupled with an intention that such residence be permanent and not temporary. Both residence and intention must be present. No single factor is controlling. All of the acts, declarations and conduct of a person, the manner of living, connections, associations, and interests must be considered, and from the over-all picture, intention must be ascertained.” (Dupuy v. Wurtz, 53 N.Y. 556; Matter of Newcomb, 192 N.Y. 238; Matter of Daggett, 255 N.Y. 243; Matter of Trowbridge, 266 N.Y. 283.)

Once established, a person’s domicile will continue until changed. A change in domicile must be evidenced by a move to another location with the intention to make the new location the place of principal residence. The burden of proving change is on the party alleging it.

What is required to change domicile to another state?

When planning a change of domicile, and for a higher likelihood that such change may be recognized by a state for estate tax purposes, there must be demonstrated intent to make a permanent new home or to establish the new domicile for a substantial or indefinite period of time. (Intent must show the new place to be a true home and not just a domicile for legal purposes.) To demonstrate intent, the individual should manifest their intention by affirmative acts. The more substantial the manifestation, the greater weight it will be given if a dispute arises. Oral declarations of domicile are admissible; however, written declarations are better evidence. When permitted by local law, the filing of a declaration of domicile or nondomicile can be extremely useful. However declarations, no matter how formal, will be disregarded if contradicted by physical acts.

Subjective and objective proof of domicile

Proof of domicile may consist of two types of evidence: subjective and objective. The individual seeking to establish a domicile should take specific and affirmative steps to indicate intention. In establishing a particular domicile, the following are some of the acts that may be undertaken.

Subjective proofs of domicile may include:

1. Spend as much time at the principal home as possible. Where two or more homes are maintained, spend more time at the principal home than at the others.
2. Conduct the maximum possible amount of business activity in the domicile state.
3. Be active in clubs, churches, and social organizations in the domicile state.
4. Furnish the principal home more substantially than any of the other homes you maintain.
5. Keep objects of family or sentimental interest in the principal home. This would include heirlooms, paintings, art, and family records.
6. Keep your main personal bank account in a local bank in the domiciliary state.
7. Establish relationships with professional advisors in the domiciliary state.

Objective acts indicating objective proof of domicile may include:

1. Execute a new will reciting the new domicile.
2. Register to vote in the domicile state and secure a new driver’s license.
3. Use the domicile address in all documents and records such as automobile registration, credit cards, Social Security records, mailing addresses, hotel registrations, mortgages, and leases. Where a new domicile is acquired, make sure that the address on all the above is changed as soon as practicable.
4. Pay all taxes from the place of domicile.
5. Use the domiciliary address in the filing of tax returns and file the returns in the place of domicile whenever possible. This is especially important with regard to personal federal income tax returns, which must be filed from the place of legal residence.
6. Take advantage of tax benefits granted to a domicile, such as homestead tax exemptions. These benefits should not be claimed in other areas.
7. Where there is a change in domicile, notify all interested parties. This should include the post office, banks, employers, family and friends, clubs, your attorney, and tax authorities in both the old and new districts.
8. Participate in local organizations, clubs, and government services open only to a domiciliary resident.
9. Make out a Declaration of Domicile (a legal document that defines where you reside and where you intend to reside permanently) file it with the clerk of courts in the county of domicile. Keep a copy with your important documents, such as your will.
10. File any local tax returns required from residents.
11. Take affirmative action to terminate residence in other states by notice to tax authorities, cancellation of voter registrations, resignation or notification to organizations and clubs, and other similar acts.

Residency and domicile strategies: How Cerity Partners can help

Given the potential imposition of an income or estate tax from multiple states, documenting a change of domicile when you own properties in multiple states is critical. Failure to act may lead to excessive taxation and even fines or penalties. Professional guidance in this area by trusted professionals who have guided families through similar moves is valuable. Please reach out to a Cerity Partners tax and estate advisor if you would like to learn more or develop a strategy to change domicile.