Breaking up can be difficult if the other party won’t let you go. People moving out of high-tax states can learn it the hard way – through a residency audit.
States such as New York, California, and Illinois use audits to claim that your recent interstate move was just a tax dodge and that you still owe their state income taxes. Proving that you have actually moved and that you plan to make the new location your permanent home – yes, the onus is on you during a residence audit – often requires much more than showing your new driver’s license or driving license. spend a number of days outside the old state.
Who is most at risk
Technically, anyone who leaves a High tax state could be under scrutiny, but tax experts say the risk of residency verification increases if:
You moved to a state with a much lower tax burden.
You still have a house or business connections in the old state.
You moved just before you sold a business, a bunch of stocks, or some other valuable asset.
You are in a high tax bracket.
Wealthy people leaving high-tax states are virtually certain to face a residency check, said tax attorney Mark Klein, a partner at Hodgson Russ in New York. The stakes can be substantial: New York raised around $ 1 billion through residency audits from 2013 to 2017, according to Monaeo, a company that sells a locator app to prove tax residency. More than half of the roughly 3,000 people audited each year lose their cases, and the average amount collected per audit was $ 144,270, Monaeo calculated.
Auditors go where the money is. You are unlikely to be audited if you are already in a low tax bracket and sever all ties to your old state. But the more you have to gain from moving away from a high-tax state, the more careful you need to be in this decision, according to tax experts.
What really matters in a residency audit
Many people mistakenly think they only need to spend 183 days a year outside of their old state to earn a residency audit, Klein says. But if you spend more days in the high tax state than elsewhere, you could still be considered a resident. This can be a particular problem for “wealthy migrants” who own homes in more than one state, or even for more ordinary people who travel a lot. Klein advises his clients to spend at least twice as much time in their new home state as in the old one.
Auditors look at a wide range of factors to determine where your real home is. Do you still see doctors and dentists at your old facility? Is your family celebrating the holidays there? Where do you keep your most valuable items – your photo albums, family heirlooms, pets? Where is your safe?
Create a good paper trail
Creating a substantial paper trail can be the key to winning your case. Register to vote and get a driver’s license in your new state, but don’t stop there. You should also change vehicle registrations, update the address where you receive bank statements, invoices and other mail, and revise your estate planning documents to reflect the laws of your new state.
People undergoing residence audits typically have to prove their whereabouts on each day of the year in question, Klein says. Cell phone records – which can show where you were with every text or call – can be used by taxpayers to prove their case, but can also be subpoenaed by the tax administration. Other potentially rich (and supportable) data sources include travel records, credit card receipts, and toll collection devices, such as EZ Pass.
You may need to keep records indefinitely. Although most audits take place a few years after the last tax return you filed, there is often no statute of limitations if a state believes you should have filed a return but you did not. not done.
Those at high audit risk should also consult a tax expert who specializes in residence audits, especially if they keep a home or business in their old state, or if their move might not be their last. If you are starting in California and moving to Nevada, but the residency checkers don’t catch up with you until you move back to Arizona, your stay in Nevada could be considered temporary and you could owe California taxes for this period.
“You have to hold the landing,” says Klein.
This article was written by NerdWallet and was originally published by The Associated Press.