State tax residency determination represents a significant planning area for high-net-worth individuals, particularly those with substantial income events or those who spend time in several jurisdictions. As states face increasing budget pressures, tax authorities across the nation continue to develop increasingly sophisticated approaches to capturing revenue from residents and former residents alike.
States including California and New York stand out as particularly assertive in their enforcement efforts, employing comprehensive audit programs that examine various factors beyond a taxpayer’s physical presence. These states typically focus their resources on situations involving taxpayers that have relocated to lower-tax jurisdictions like Nevada, Florida, or Texas—especially when such moves coincide with significant income recognition events.
The technical complexities of state residency determination extend beyond simply counting the number of days an individual spends in different jurisdictions. Tax authorities apply nuanced facts-and-circumstances tests that examine various aspects of an individual’s life, from voter registration and business connections to family relationships and professional associations. Understanding these technical frameworks is essential for effective tax planning, particularly when substantial capital gains, equity compensation, or trust structures are involved.
State tax residency involves two related but distinct concepts that taxpayers frequently confuse. On one hand is statutory residency, which relies on clear, objective criteria. On the other is domicile, which is more nuanced and driven by intent.
Statutory residency rests on a two-part test in states such as New York, Connecticut, and New Jersey. A taxpayer meets that standard by maintaining a permanent place of abode (PPA) for substantially all of the year and spending at least 183 days—184 in New York—there. If these criteria are met, the state will treat the taxpayer as a full-year resident. California uses a different approach. More than nine months triggers a rebuttable presumption of residency; fewer than nine months lifts that presumption and shifts the analysis to domicile.
Domicile involves a deeper evaluation of intentions and lifestyle rather than merely counting days. Auditors consider whether the taxpayer genuinely intended to make the state their permanent home, examining factors beyond physical presence to determine primary ties and relationships.
Factors commonly evaluated include:
Residency presumptions typically favor the state. Thus, taxpayers must clearly document their transition away from their former state and genuine integration into their new location. This documentation becomes particularly critical if the relocation closely precedes significant income events, making the timing and authenticity of the move crucial to withstand scrutiny.
State tax authorities focus enforcement on scenarios with the highest revenue at stake. Understanding these high-risk situations allows for more effective planning and documentation strategies.
Large capital-gain events are the single most common audit trigger for residency exams. When substantial stock sales, business exits, or real-estate gains occur soon after a move to a lower-tax state, auditors scrutinize the timing and substance of the move. That proximity puts the burden on the taxpayer, and those auditors routinely demand proof the relocation was bona fide and not ‘just-in-time’ tax planning.
Executive compensation is another focus area because equity often vests over several years. States often source that income to where the services were performed during vesting, not where the taxpayer lives when it is recognized. This approach creates the potential for taxation in multiple jurisdictions without careful planning and documentation of the compensation’s connection to specific work locations and time periods.
Trust structures—including incomplete-gift non-grantor trusts (INGs such as NINGs, DINGs, and WINGs)—are now under closer scrutiny. States such as California and New York use detailed rules to decide whether trust income remains taxable, focusing on grantor or beneficiary residency, trustee location, and where administration occurs. Historically, INGs were marketed as a simple way to shift income out of high-tax states. However, recent enforcement efforts have limited the effectiveness of these structures by asserting that factors such as trust administration location or beneficiary residency create sufficient ties to continue taxing trust income. Without careful alignment of trust structure, administration, and key participant residency, taxpayers may inadvertently trigger significant and unexpected state tax liabilities.
Effective residency planning requires careful consideration of the technical rules across relevant jurisdictions. For individuals with connections to multiple states, this often involves managing part-year and non-resident filing obligations alongside potential claims of dual residency by competing tax authorities.
When relocating between states, taxpayers must establish clear documentation of their transition timeline. This includes not only the formal date of the move but also evidence of diminishing connections to the former state and increasing integration into the new jurisdiction. Inconsistencies such as maintaining professional licenses, club memberships, or significant business activities in the former location can undermine otherwise well-planned transitions.
Managing domicile factors is especially important when individuals keep ties to multiple jurisdictions. Creating and documenting a clear narrative regarding future intent—whether demonstrating plans to return to the original jurisdiction or establishing permanent connections to the new location—provides critical support during potential residency examinations. For more complicated scenarios, detailed matrices and write-ups can be beneficial.
State tax residency planning represents a technical area with significant financial implications for high-net-worth individuals. The aggressive enforcement approaches of high-tax states require careful consideration of both statutory residency tests and the subjective factors that determine domicile status.
Effective planning involves comprehensive documentation of transition timelines, thoughtful management of business and personal connections, and strategic timing of significant income events. For complex situations involving multiple jurisdictions, trust structures, or international elements, specialized technical guidance becomes particularly valuable in navigating the competing claims of tax authorities and minimizing unnecessary tax exposure.
Sapowith Tax Advisory provides the technical insight and planning experience needed to navigate state residency determinations with confidence. Through careful analysis of individual circumstances and documentation requirements, we help clients establish clear residency positions that withstand regulatory scrutiny while supporting their broader financial objectives.
If you need assistance navigating state tax residency considerations, contact Sapowith Tax Advisory now.
This article is for general information only; it is not tax, legal, or accounting advice. Reading it does not create a client relationship with Sapowith Tax Advisory. Consult your own qualified advisers before acting on any information contained here. Sapowith Tax Advisory disclaims all liability for actions taken, or not taken, based on this content.