State Tax Residency Risk Assessment: Avoid Costly Audit Triggers

State tax residency determines which state can tax your income and dictates your total tax burden. If you’re considered a resident of a high-tax state like California (13.3% top rate) or New York (10.9% top rate), you could pay significantly more than residents of states like Florida or Texas, which have no state income tax.

Understanding and strategically managing your residency status is one of the most powerful legal tax optimization strategies available to high-income individuals.

State tax audits typically target individuals who claim residency changes to lower-tax states, especially when moving from California, New York, New Jersey, or Connecticut. High-risk factors include:

• Income Level: High earners ($500K+) face significantly higher audit rates

• Maintained Ties: Keeping homes, businesses, or family in high-tax states

• Timing Issues: Poorly documented residency change dates

• Pattern Recognition: Multiple residency changes or suspicious timing around large income events

Domicile ties are connections that link you to a particular state and determine your true “home” for tax purposes. States evaluate these ties to determine your permanent residence intent:

Strong Domicile Ties:

• Primary residence location and ownership duration

• Voter registration and driver’s license

• Business operations and professional licenses

• Bank accounts and investment management

• Family relationships and social connections

The stronger your ties to a high-tax state, the higher your audit risk and potential tax exposure. Effective residency planning requires systematically severing ties to high-tax states while establishing clear domicile in your target jurisdiction.

Yes, you can legally change your state tax residency through careful planning and proper execution. However, this requires more than simply buying property in a tax-friendly state.

Effective Residency Change Strategy:

• Establish clear intent to make the new state your permanent home

• Spend the required time in your new state (typically 183+ days)

• Systematically sever domicile ties to your former high-tax state

• Document every aspect of your move with detailed records

Residency is typically based on time spent in a state (usually 183+ days per year), while domicile is your permanent home where you intend to return and remain indefinitely.

Key Differences:

• Residency: Can have multiple state residencies simultaneously

• Domicile: Can only have one domicile at any given time

• Tax Impact: You’re generally subject to tax in your domicile state regardless of time spent there

• Evidence: Domicile focuses on intent and permanent connections, not just physical presence

Several states apply a “183-day statutory-residency rule”—for example, New York, New Jersey, and Massachusetts treat you as a resident if you spend 183 or more days there in a tax year. Other states, such as California, rely on a facts-and-circumstances test focused on your domicile and intent rather than a specific day count.

Complex State Formulas:

• Some states count partial days as full days

• New York’s complex formula can create liability with fewer than 183 days

• California focuses heavily on intent, not just day counts

Safe Harbor Guidelines:

• Stay under 183 days in your former state

• Many advisors suggest keeping visits well under 183 days – some use 60- to 90-day ceilings as a prudent buffer – but the exact ‘safe’ number depends on the state’s own rules and your remaining domicile ties.

• Document all time spent with detailed calendars

While not always legally required, selling your former primary residence significantly strengthens your residency change case and reduces audit risk.

Why Property Matters:

• Keeping a home in a high-tax state is one of the strongest domicile ties

• States view property ownership as evidence of continuing ties

• Personal use of former property can trigger residency claims

Strategic Alternatives:

• Convert to rental property with limited personal use

• Transfer ownership to family members or trusts

• Maintain property purely as investment with third-party management

Comprehensive documentation is critical for defending your residency change in potential audits. Essential records include:

Government Records:

• New state driver’s license and vehicle registration

• Voter registration in new state

• Professional licenses transferred to new state

Financial Records:

• Primary bank accounts moved to new state

• Investment management and advisory relationships

• Tax return filings showing new state residency

Lifestyle Documentation:

• Detailed calendars showing time in each state

• Utility bills and residence records

• Club memberships and social affiliations