The Tax Differences Between Domicile and Residency
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Domicile vs Residency
When it comes to determining which state or states a person will be subject to taxes in, if they reside in multiple states throughout the year, it is important to determine whether or not that person is a resident of a state or domiciled in a state — noting that while there is overlap, the tax implications can be markedly different for the taxpayer. That is because, while a Taxpayer may have several different states that they reside in, they only have one domicile. And, with states like California, a person may try to reside in multiple states in order to take the position that they are not a resident of California sufficient for California to be able to tax them on their worldwide income — but rather only the income they have sourced within California (such as a rental property). Different states have different tax tests to determine whether or not a person is domiciled within their borders. In California, Taxpayers should refer to the Revenue and Taxation Code. And, especially for taxpayers who have a high income, being taxed at 10 to 15% by the State of California as opposed to having no stated tax in states like Nevada or New Mexico can have a significant impact on their overall tax liability. Let’s use California’s domicile laws to evaluate the concept of domicile vs residence.
Definition of Residence and Domicile
(a) “Resident” includes:
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(1) Every individual who is in this state for other than a temporary or transitory purpose.
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(2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.
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(b) Any individual (and spouse) who is domiciled in this state shall be considered outside this state for a temporary or transitory purpose while that individual:
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(1) Holds an elective office of the government of the United States, or
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(2) Is employed on the staff of an elective officer in the legislative branch of the government of the United States as described in paragraph (1), or
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(3) Holds an appointive office in the executive branch of the government of the United States (other than the armed forces of the United States or career appointees in the United States Foreign Service) if the appointment to that office was by the President of the United States and subject to confirmation by the Senate of the United States and whose tenure of office is at the pleasure of the President of the United States.
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(c) Any individual who is a resident of this state continues to be a resident even though temporarily absent from the state.
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(d) For any taxable year beginning on or after January 1, 1994, any individual domiciled in this state who is absent from the state for an uninterrupted period of at least 546 consecutive days under an employment-related contract shall be considered outside this state for other than a temporary or transitory purpose.
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(1) For purposes of this subdivision, returns to this state, totaling in the aggregate not more than 45 days during a taxable year, shall be disregarded.
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(2) This subdivision shall not apply to any individual, including any spouse described in paragraph (3), who has income from stocks, bonds, notes, or other intangible personal property in excess of two hundred thousand dollars ($200,000) in any taxable year in which the employment-related contract is in effect. In the case of an individual who is married, this paragraph shall be applied to the income of each spouse separately.
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(3) Any spouse who is absent from the state for an uninterrupted period of at least 546 consecutive days to accompany a spouse who, under this subdivision, is considered outside this state for other than a temporary or transitory purpose shall, for purposes of this subdivision, also be considered outside this state for other than a temporary or transitory purpose.
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(4) This subdivision shall not apply to any individual if the principal purpose of the individual’s absence from this state is to avoid any tax imposed by this part.
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Understanding Domicile vs Residence
When a person has a residence in a state, it means that they reside in the state either permanently or temporarily for a certain amount of time each year. But when a person has a domicile, it means that their intent is to make that state their home. In order for a state to be a domicile, a person must voluntarily submit themselves to that state with the purpose of that state being their permanent home and principal establishment. As provided under California law, a person may have domicile in one state and residence in another state.
As provided by the FTB Publication 1031:
Meaning of Domicile
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The term “domicile” has a special legal definition that is not the same as residence. While many states consider domicile and residence to be the same, California makes a distinction and views them as two separate concepts, even though they may often overlap.
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For instance, you may be domiciled in California but not be a California resident or you may be domiciled in another state but be a California resident for income tax purposes.
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Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment.
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It is the place where, whenever you are absent, you intend to return. The maintenance of a marital abode in California is a significant factor in establishing domicile in California.
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Change of Domicile
While a person may have several residences, they will only have one domicile at a time. Of course, a person may change domicile several times throughout the course of their lifetime, but under California law in order to change domicile out of California, they are required to do the following:
As provided by the FTB Publication 1031:
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You can have only one domicile at a time.
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Once you acquire a domicile, you retain that domicile until you acquire another. A change of domicile requires all of the following:
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Abandonment of your prior domicile.
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Physically moving to and residing in the new locality.
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Intent to remain in the new locality permanently or indefinitely as demonstrated by your actions.
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Permanent Residence vs Temporary Residence
One of the key distinctions between residence and domicile is the concept of permanence versus temporary residence. For example, if a person is moved to a new state for work purposes but they have no intention of making that state their home beyond working at the location for a temporary job or assignment, the second state would not be their domicile – although they do have temporary residence in that state. Likewise, if a person is domiciled in one state with every intention of remaining in that state but is temporarily relocated for employment purposes, then the first state in which they intend to remain a resident and to which they have established themselves in would still be considered their domicile.
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