State Residency and its Effect on Taxes
When it comes to slamming the tax hammer on the wealthy, one area government officials are intently focusing on is state residency. Specifically, when is someone legally a resident of a state or other tax jurisdiction and subject to its taxes?
Inquiries into such matters usually start with a state residency audit, which can be as simple for a taxpayer as filling out a questionnaire or as complicated as answering repeated and onerous requests for information and documents.
The dollars at stake in a residency audit can be staggering. If a state successfully establishes that an individual is a resident, it will generally apply its tax rate to 100% of the individual’s taxable income for the year, with credit given for taxes paid to other states only when the taxed income was derived in the other state. The taxes owed can be particularly high in states that have enacted so-called “millionaire” brackets that tax all income above specified thresholds at particularly high rates.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.