Which State Tax Authorities Love You?

Which States Can Tax You

Or

Is New York or Florida Going to Tax You

State Tax Jargon a Key to Planning

Money Matters Radio – Estate Planning Q&A with Gary
Goldberg

By: Martin M. Shenkman, Esq.

Introduction/Overview:

Understanding some
of the key concepts and jargon will help you unlock some of the ways different
states may seek to tax you. You can’t sing tax karaoke without knowing the
lyrics. Here are a few words to help you sing-a-long with the state tax auditor
(hum the Beatles tune “Tax Man” as you read):

What is “nexus”?

Nexus is the magic glue that permits a state to tax you, or to impose tax
return filing requirements, on your or a business entity, such as a partnership.
Nexus is just a fancy technical term for connection. What connections do you,
or your business, have to a particular state? Once you reach a certain “weight”
of connections, you have a tax issue.

What is a resident?

Residency – Where you live currently. This is not as strong a connection as
domicile. That is important for estate planning. There is a related concept in
many states called a “Statutory Resident”. You might not make a particular
state your current home, but if you trip over the requirements that state law
uses to define a “resident” of that particular state for income tax purposes,
then you may be taxed as a resident under that law or statute as a “statutory
resident.” This may be as simple as being in that state too many days in any
given year. Do some research online and keep your diary. Note the relevant
information in your calendar, so you can avoid becoming a statutory resident
(unless that state is really your home). This is a tricky concept.

What is the difference between residency and domicile?

You may pay income tax as a resident but estate tax where you are domiciled.
That is really important to understand.

Be really careful. Every state’s rules differ, and those rules evolve over
time. Often the law will depend on case law which can be very fact
sensitive.

What is “domicile” and why is it so tough to wiggle
around?

Domicile is the place where you permanently reside and where you eventually
intend to return. If you want to avoid tax in a particular state in which you
lived, you’ll need to break your “domicile” there. The toughest part of this
for many taxpayers (like all of those New Yorkers who claim they live in Florida)
is to really establish a new domicile. If you’re traveling a lot that may be
tough.

Any last tips?

There are a number of ways a state can find a connection or basis to tax
you. To avoid tax entirely by a particular state, you need to understand and
monitor each of these. In most cases if you spend a considerable portion of the
year in a particular state, maintain a permanent home in that state, or work in
a state you’ll probably face state taxation. There is a lot of gritty details
as to how states can tax you and what you might need to do when more than one
state is after your tax dollars. Just remember, planning and understanding the
law, can safe you tax dollars, audits and aggravation (and perhaps worse).