State residency is tricky in tax season

Every year around this time, people grumble about their tax bills. This year, taxpayers who lost the deduction for state and local taxes in the 2017 tax overhaul bill — mainly those in California and states in the Northeast — are going to grumble more. And for some, that grousing has turned to talk of fleeing to lower-tax states.

Those wealthy enough to own homes in multiple states will want to have their cake and eat it, too. Some will try to establish residency in one of the seven states that have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

In doing so, they will reduce their tax bills substantially: up to 13 percentage points for California residents, for instance, or nearly 9 points for those in New York and New Jersey.

The people trying to take advantage of this strategy have always been a target of state tax collectors, but financial advisers say states such as California and New York have stepped up their collection efforts, and they urge caution for anyone considering this approach.

Wealthy taxpayers have long assumed that spending a minimum of 183 days, or six months plus one day, in a residence outside a high-tax state would be sufficient to avoid taxes in that state. But advisers note this long-held belief is not a sophisticated approach.

“There are some states that have strict day counts, but California is much more subjective,” said Chris Campbell, a principal at Deloitte Tax. “Generally speaking, you can be a resident of California for tax purposes after a few days or months.”

New York tax collectors assume you are living in their state — even if you are spending the majority of your time elsewhere — and expect to be paid accordingly.

“In the tax world, you’re guilty until you prove yourself innocent,” said Timothy P. Noonan, a partner at Hodgson Russ, a law firm where he focuses on state and local tax law issues. “If you can’t prove where you were, the state will assume you were in their state.”

So much for flying off to Nevada or Florida and leaving your state tax bill behind.

In the high-stakes game of tax collecting, states can seek unpaid tax bills that climb into the tens of millions of dollars. People who have legitimately moved to a different state have to be ready to prove their residency. But so do executives who travel around the country for work.

The first requirement is proving your state residency. For most people, a driver’s license will suffice. But for wealthier taxpayers who have homes in two or more states, it’s not so easy.

There are apps like Monaeo, TaxBird and TaxDay, which count days spent in each state, alerting people when they get too close to the 183-day limit.

Michael Kosnitzky, a partner at the law firm Pillsbury Winthrop Shaw Pittman, who divides his time among Colorado, Florida and New York, said that counting days was insufficient and misleading.