Where You Live Affects Your Taxes

Where do you live?

As in many areas of tax law, what seems a simple question can have broad implications. For example, say you own more than one home. Determining which is your main residence is necessary in order to exclude some or all of the gain from your federal income tax return when you sell.

Where you live affects your state income tax too. Are you considering moving to a state with a lower tax burden? You should know the mere act of relocating might not relieve your tax responsibility to the state you moved from, even if you think of yourself as a resident of the new state. That’s because many states use the legal concept of “domicile” to assess whether you’re liable for state tax. What’s the difference? Residency is where you physically live. Domicile looks to your intent, such as whether you maintain significant business or family ties to your former home.

Domicile also plays a role in estate tax planning, especially when you own property in more than one state. Generally, real property in your estate is taxed based on its location, while other assets are taxed where you are domiciled. If you fail to establish domicile, some of your estate could be taxed twice.

Students, military personnel, and expatriates also face tax effects from domicile decisions. Please contact us for specific information on your situation.