In today’s digital world, some individuals, especially traders, can conduct their economic activities while traveling around the U.S. and the world. However, states like New York continue to subject people to resident taxation until they formally change their domicile. This raises concerns for individuals who are in a state of limbo, never establishing a new permanent home.
Historically, a change of domicile would occur when a family physically moved their home contents from one state to another. However, as families now travel for extended periods without settling in a new location, the concept of domicile becomes more complicated. States have subjective and objective tests to determine tax residency, and tax auditors enforce residency rules.
New York State, for example, subjects domiciled residents to resident taxation on worldwide income. Individuals who move out of state may mistakenly believe they no longer owe New York State taxes. However, NYS requires a formal change of domicile, including establishing a new permanent home in another state or country. Failure to meet these requirements can result in being stuck in a tax limbo.
The rules for a change of domicile in New York State are outlined in state publications such as Publication 88. Residents must demonstrate clear and convincing evidence of abandoning their New York domicile and establishing a new one outside the state. Factors such as voting location or the state where a driver’s license is issued are not primary in establishing domicile.
In recent years, many traders and hedge fund employees have relocated from high-tax states like New York and Connecticut to states without income taxes like Florida. However, some individuals may not fully understand or comply with the stringent rules for changing domicile, risking continued taxation in their previous state. State domicile rules are complex and involve subjective factors beyond formalities like voting and licenses.
Overall, relying on antiquated domicile rules crafted before modern technologies and new ways of living and working can be unfair to individuals who travel extensively or work remotely. It is essential for taxpayers to understand the specific rules for changing domicile in their state and ensure they meet all requirements to avoid being stuck in a tax limbo situation. Consultation with a tax professional may be necessary to navigate these complex rules and avoid potential tax liabilities.
