Knowing What Counts Podcast

Tax Residency Complexities: Insights from Jeff Laboe on Statutory and Domicile Tests

• Tim Provost, CPA • Episode 3

Share episode

Send us a text

How Can Tax Residency Issues Impact Your Financial Situation, And What Should You Know About Audits?

Learn the secrets to navigating the maze of tax residency with our latest Knowing What Counts Podcast episode. Join me, Sophia Yvette, as I sit down with Jeff Laboe, a tax manager at MP CPAs with over a decade of experience. Jeff breaks down the convoluted world of tax residency rules, offering insights into how both statutory residency and domicile tests play pivotal roles in determining your state of residence for tax purposes. Learn how these factors can trigger audits and impact your financial landscape, especially if you're stuck in the wrong state. This episode promises to arm you with the knowledge necessary for making informed decisions regarding your tax residency.

Discover how varying state regulations can influence your finances and why understanding the 183-day rule is just the beginning. Jeff explains the more nuanced domicile test, which is often the focus of auditors and legislation. Whether you're a high net worth individual or a business owner, Jeff's expertise will guide you through the complexities of staying compliant while minimizing risks. Don't miss this engaging discussion that aims to equip you with the essential tools to protect and optimize your wealth, making sure you're always ahead of the curve in the ever-changing world of tax regulations.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with knowing what counts.

Speaker 2:

Navigating tax residency rules can feel like a game of musical chairs. Get caught in the wrong state and your finances might suffer. The experts at MPCPA share how residency issues can trigger audits and what strategies can help you stay compliant while minimizing risk. Welcome back everyone. I'm Sophia Yvette, co-host slash producer, back in the studio with Jeff LeBeau, tax manager at MPCPA. Jeff, how's it going?

Speaker 3:

It's going great. Sophia, Thanks for having me. I like that little teaser. That was a great little teaser there. If anybody's not already diving head first into listening to what we got to say today, shame on them. I've been a tax manager here for four or five years, but I've been at the firm for almost 15. Yeah, I know it doesn't look like it, but I'm getting up there in age. But with age comes experience, and these days residency is a big question for a lot of our clients and something everybody seems to be talking about at cocktail parties, other podcasts and on social media. Hopefully we can have a little conversation today and give people just enough ammo to be dangerous or just enough interest to give us a call and we can work with you and help you through really figuring this out best for your situation.

Speaker 2:

Most definitely, and I'm with you there, jeff. So, jeff, how can tax residency issues impact your financial situation and what should you know about audits?

Speaker 3:

That's a loaded question too. I mean today in our podcast is give you a little background on what residency is, what the taxing authorities look at, as well as how it plays into what an audit looks like and what you can plan on Everything we hit on. I think we're going to try to. We could have a three-hour training on this if we wanted to, but that's not what we're here to do today. So we'll try again. Give you enough ammo to be a little dangerous when you're talking or thinking through things, but ideally, we want you to reach out to us and we can help you through this.

Speaker 3:

Residency is not a black and white situation, as some make it sound, or one would think it is. I think, to start off, we just want to really hit on. Every state is a little bit different. Every state has different rules and regulations, but for the most part, they all follow a two-prong approach. There's two tests you really have to think through or go through when determining and figuring out what your state of residency is. There's the statutory residency aspect where 183 days everybody's heard of the six-month or 183-day rule. You have to be in that state for 183 days or more and then you have to have a permanent place of abode or you have to have a house that you live in. Whether it's renting or owning, that doesn't necessarily matter.

Speaker 3:

The statutory residency aspect is 183 days. Have a place of abode in the state, and that's pretty objective. You're either in the state more than 183 days or you're not. Or you have a place of abode or not. That's pretty objective. It is what it is. Then there's the second prong to this the domicile or legal residence side of the equation. That is really the one that comes into play, the one that auditors look at, the one that every state's talking about. Every article, every legislation really comes down to this domicile test, and that's the one that I think we'll focus on most today. Again, it's not the only end-all be-all, neither is the statutory residence one, but those are the two tests the statutory residence test and the domicile test that are in consideration when trying to figure out your residency for income tax purposes.

Speaker 2:

Now, Jeff, you did mention that this isn't exactly black and white. So what factors determine tax residency and how can they vary between states?

Speaker 3:

Yeah, I mean, that's the big thing. I think everybody's probably well aware that pretty much every state is not pulling in enough tax revenue. So they're trying to find ways to increase that revenue and not necessarily increase taxes, because nobody likes to see that on a ballot, but the way they is to better monitor and have better compliance on if you're a resident or a non-resident in that state and what income is sourced to that state for tax purposes. So they're not increasing taxes, they're just increasing the collection and the compliance, more so to making sure that people are abiding by the rules. And the big impact in the states is when states do increase taxes or for Massachusetts purposes. You know, last year they implemented the millionaire's tax or the 4% surtax on residents in the state. That's just an example of what some of these states are doing to help increase that tax revenue. And the big thing we see on the states is that people the states you're moving to love to have you. They're not making any stinks about it. Come on in, we'll tax you on whatever we can. You're a new resident to our state.

Speaker 3:

It's the state that really comes into play when you're getting into state audits and how it really impacts you, and the biggest factor or the biggest kind of cheat you can have here is the state you're leaving. You have to leave. Not only leave that state, but land somewhere else, right there. That's the key here. People just think, well, I'm going somewhere else for more than 183 days I'm not in Massachusetts, or I'm selling my house, but I've got a house in three other states that I'm spending time in. That's great, but if you're not establishing a residence or domicile somewhere else, that's where you're going to get into trouble with that state you're supposedly leaving. I'm not sure if that really answers your question, sophia, but I think that's the thing we need to consider here. When talking about residency, it's just not getting out of your state, but establishing yourself somewhere else. Otherwise, that state is going to continue to come after you that state is going to continue to come after you.

Speaker 2:

I would say it most definitely shines light on the question, for sure. Now it's hard to cover answering the question fully, because we would probably be here till tomorrow if we did.

Speaker 3:

I'm sorry to cut you off, sophia, but I think that's where although Massachusetts is kind of our focus here today because that's where our main office is, here in Springfield but all the states are starting to look at things pretty much in the same factor they want to get that as much sourced income. And if you're not showing us that you're really moving out and changing your lifestyle, you're still here and you're still subject to those residency rules, and every state's pretty much the same on that front.

Speaker 2:

Now, how do state residency rules impact tax liabilities for individuals with multiple properties?

Speaker 3:

Yeah. So when it comes to the residency is that you have your home domicile, your residence, and then you have other properties that could be in other states where you might have to file what we call a non-resident income tax return. The way the taxes work on that is pretty straightforward your resident state, your domiciled state, gets taxed on all your income and the non-resident state is only taxed on the sourced income to that state. The argument, the discussion, the debate always is what's my resident state versus my non-resident state? And that kind of dictates who gets the bulk of the tax or who gets the first dib at that tax liability. And so when dealing with residency again, if you're not establishing a resident in a different state, you still are considered a resident of the old state, of which they might get first dibs, or they have the first right to all that income or they'll tax all that income, whereas the non-resident state only taxes that sourced income. So that's where the play comes is where's your resident state? What are you a non-resident? Should you be a resident? Should you be a non-resident? Those are the things you have to think through when not only moving your life and changing your lifestyle, but starting businesses in other states, owning rental properties in other states, all those other things that come in when you're doing those activities in a non-resident state that you really have to think through. And that's where we at MPCPAs can really help you navigate those changes.

Speaker 3:

It's not as simple as oh hey, you know what, I want to retire and I want to move to Florida. Well, that's great, we want to help you do that. But there's several things you got to think of both before you move. After you move that, go into that to really determining where that tax is going to be right. These states, almost all of them.

Speaker 3:

You know there's still a few states out there that don't tax you on personal income, but for the most part states do and they all want their part right. So it's our job to hopefully help you kind of really determine how the best go about that to avoid those audits. I know we're going to get into that here in a little bit, but there's no one right way to move your residency or change your residency. It's a situational basis and you just never know what you're going to get out of these audits. But, fortunately, or or change your residency it's a situational basis and you just never know what you're going to get out of these audits, but fortunately or unfortunately, we've been through a lot of them and we're here to help.

Speaker 2:

And what proactive steps can individuals take to reduce the likelihood of an audit?

Speaker 3:

up there in age and you're thinking about retiring, or your family's grown up now, they're all off starting their own families and you're ready to move to sunny Arizona or the nice warm weather of Florida, reach out to your tax professional. Hopefully that can be us. A couple of things we can give you here to everybody. The total audience here is one make a plan, have a plan of when you want to do it and start early. Right. If you just all of a sudden wake up one day and say I want to move tomorrow, well it doesn't give you a good chance to plan. But most people whether that's age, job, family, you know, maybe they're thinking about selling their business, things like that that you know of ahead of time. And as soon as you start to think about it, that's when you need to start thinking about planning and what you need to do to make that move. It can't be just I'm retiring tomorrow and then the next day I want to move. You really need to start thinking about it months, years in advance if that's something that's of interest to you. Most people, most of our clients, know, or most of our clients maybe already have houses in other states, in other regions, in other countries that they own, that they vacation at, that could be a possible moving place. A lot of people do think about it, but not just thinking about it for lifestyle changes. But when you're looking at that and thinking through, well, maybe I am, my kid's grown up, they're going to college, maybe I do want to move and do some more stuff for me, for my you know, for me and my spouse, those are the times you need to start thinking through, and a couple of those things are is clearly planning to move, right, all the expenses that go with to that into moving, all the expenses and thought process that goes into. Well, what am I going to do next? You know, if I'm retiring from my job, what am I going to do with my time? Right, that could dictate where you want to move and that could dictate a lot of the residency issues we see in audits.

Speaker 3:

Right, in audits, a thing we see a lot of is the auditors will ask you and say show me how you've moved, how you've moved to Florida from Massachusetts or Texas or whatever it is, and to do that, you're going to have to show them receipts for paying movers. You're going to need to show them, hey, I've changed my license and registration, both personally, for my vehicles. I've changed insurance companies. I've changed doctors. I've changed you know where I've changed insurance companies. I've changed doctors I've changed. You know where I rent my movies from. I've changed where my bills get paid from. All these little things that you know.

Speaker 3:

There are checklists out there.

Speaker 3:

We have checklists that we can work with you on, and those are all little things that you'll need to do to establish that new residency in a new state.

Speaker 3:

Those are things you can start thinking through before you move, like, okay, I got to change utilities or okay, I should probably be looking at new doctors in the area I want to move to. So things like that are what the auditors and if someone was to go through a state residency audit like this that you'd really have to think through and have documentation and support for. I think that's one thing we see a lot of in state audits is that people do the behaviors or change their lifestyle and do some of the things that we would recommend, but they don't have good documentation on it right. Get those receipts, make those notes, keep that calendar right, those things to meet the statutory residency tests as well as the domicile test, and that's where we see the states being very strict on and what can turn out to be a long, lengthy process is if you don't have that support but you feel and we've done everything you need to do if that support isn't there, you're going to have a hard time negotiating with the state that you've moved and established residency elsewhere.

Speaker 2:

Love it, Jeff. We'll catch you on the next episode. Have a fantastic rest of your day.

Speaker 1:

No problem, thanks, sophia fantastic rest of your day, no problem. Thanks, sophia. Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit thempgroupcpacom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.