Establishing Nevada Residency and Multi-State Tax Issues
As neighboring states, most notably California, impose ever-increasing income taxes on residents, more and more of those residents are looking to relocate to a more tax-friendly locale. Frequently, Nevada rises to the top of the list due to its location and the fact that Nevada imposes no state income tax, no gift tax, and no estate tax on residents. Our firm regularly works with clients seeking guidance and help with establishing and maintaining Nevada residency.
Abiding by Nevada Residency Requirements
California Revenue and Taxation Code Section 17014(a) describes “resident” to include:
(1) “Every individual who is in California for other than a temporary or transitory purpose”; and
(2) “Every individual who is domiciled in California who is outside the state for a temporary or transitory purpose.” Conversely, any individual who is not a California resident is a “nonresident.”
While the law briefly defines resident and non-resident, there is very little formal guidance when it comes to determining California residency for personal income tax purposes. Accordingly, the determination of California residency is not simple.
Regarding California’s Franchise Tax Board (FTB)
To California’s Franchise Tax Board (“FTB”), the concept of domicile is closely related to the definition of residency. Domicile is generally defined as the one location for legal purposes a person is considered to have the most settled and permanent connection, the place or community where they intend to remain and to which, whenever they are absent, they have the intention of returning.
Individuals who are “domiciled” in Nevada and become Nevada residents will generally be exempt from state taxation of their income, except for income earned from sources within another state. Even taxpayers who may continue to have a requirement to show proof of their source with one or more items of their income to a taxable state may still benefit from a significant reduction in their overall state tax obligation.
Changing domicile generally requires showing that a taxpayer moved from the state without any intention of returning and has located elsewhere with the intention of remaining in the new domicile indefinitely. The “closest connections test” is commonly used to analyze the question of a taxpayer’s residency.
A noteworthy case that is on point regarding these questions is Bragg v. California Board of Equalization dated May 28, 2003. Bragg outlines the factors that the board reviews when an FTB audit is appealed regarding residency. The case outlined the test to consider 19 factors, which the California State Board of Equalization described in the Appeals of Stephen D. Bragg.
The Factors Noted in That Appeal Include:
- The location of all of the taxpayer’s residential real property and the approximate sizes and values of each of the residences;
- The state where the taxpayer’s spouse and children reside;
- The state where the taxpayer’s children attend school;
- The state where the taxpayer claims the homeowner’s property tax exemption on a residence;
- The taxpayer’s telephone records (i.e., where the taxpayer’s telephone calls originated);
- The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states and the general purpose of such days (i.e., vacation, business, etc.);
- The location where the taxpayer files his tax returns, both federal and state, and the state of residence claimed by the taxpayer on the returns;
- The location of the taxpayer’s bank and savings accounts;
- The origination point of the taxpayer’s checking account transactions and credit card transactions;
- The state where the taxpayer maintains memberships in social, religious and professional organizations;
- The state where the taxpayer registers his/her automobiles;
- The state where the taxpayer maintains a driver’s license;
- The state where the taxpayer maintains voter registration and the taxpayer’s voting history;
- The state where the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
- The state where the taxpayer is employed;
- The state where the taxpayer maintains or owns business interests;
- The state where the taxpayer holds a professional license or licenses;
- The state where the taxpayer owns investment real property; and
- The indications in affidavits from various individuals discussing the taxpayer’s residency.
While no single factor can positively determine residency, registering to vote or claiming the homeowner’s exemption in California, for example, have been found to make the taxpayer a California resident, regardless of other factors.
Additional Factors to Consider With Your Residency Test Include:
A) The state records of U.S. Mail correspondence including P.O. Box rental locations.
B) Social Media addresses such as Facebook or Linked In, as shown on your home pages. Activity posted on any social media that show where your permanent residency is located.
As noted in the above discussion, to minimize any confusion in the determination of your state domicile, it is best to show beyond a reasonable doubt that you are a Nevada Resident, especially under a California Franchise Tax Board audit or other state Revenue Audit.