Nevada Tax Residency Case Study
When operating Las Vegas Bookkeeping in the state of Nevada we often work with business owners relocating to the state of Nevada to take advantage of the numerous tax benefits offered in the state of Nevada. The following is a modified real-world example of a taxpayer seeking the tax benefits of a no-tax state.
General: The taxpayer is expecting a significant capital gain in tax year in the upcoming income tax year. The gain would be resulting from privately owned, original issue stock from the taxpayers’ current employer. The taxpayer currently lives in southern California but works for an employer located in the state of Nevada. Currently the primary taxpayer has the flexibility to relocate to and be employed in Las Vegas where current earnings and capital gains income will not be taxed.
Authoritative Guidance: Generally speaking the state of California taxes all residents on their world-wide income.
A "resident" is defined as:
every individual who is in the state for other than a temporary or transitory purpose; and
every individual who is domiciled in California who is outside the state for a temporary or transitory purpose.
( Sec. 17014, Rev. & Tax. Code )
Domicile is defined as the place where the taxpayer has his or her permanent home, and to which he or she intends to return whenever he or she is absent. ( Reg. 17014(c), 18 CCR )
"Residency" is not the same as "domicile." ( Whittell v. Franchise Tax Board (1964) 231 CA2d 278, 41 CRptr 673, ¶202-709) One may be a resident although not domiciled in the state, and conversely, may be domiciled in the state without being a resident. ( Reg. 17014(a), 18 CCR )
The state of California provides a partial list of factors to be considered for determining whether the taxpayer is a California resident.
Residency Factors include:
the amount of time spent in and out of California;
the location(s) of the taxpayer's spouse and children;
the location of the taxpayer's principal residence;
where the taxpayer was issued a driver's license;
where the taxpayer's vehicles are registered;
where the taxpayer maintains professional licenses;
where the taxpayer is registered to vote;
the locations of banks where the taxpayer maintains accounts;
the locations of the taxpayer's doctors, dentists, accountants, and attorneys;
the locations of the church, temple, or mosque, professional associations, and social and country clubs of which the taxpayer is a member;
the locations of the taxpayer's real property and investments;
the permanence of the taxpayer's work assignments in California; and
the location of the taxpayer's social ties.
In review of guidance and court cases related to the determination of residence and California income tax filing requirements there are several key factors that are the primary considerations for determining residency.
Once a California resident, there is the presumption on continued residency until the establishment of a new domicile is proved.
Board of Equalization Appeal Andra Sachs – March 2010
“Respondent argues that its residency determinations are clothed with a presumption of correctness, that appellant was California domiciliary in 1999, and that this California domicile remains with her until she bears the burden of proving her establishment of a new domicile at a specific physical address outside California in the 2000 tax year at issue on a date that predates her receipt of the Flashcom stock sale proceeds. Respondent argues that appellant's subjective intent is insufficient to overcome this presumption, and that appellant has failed to demonstrate the required objective facts showing that she established through physical residence a non-California domicile and residence before she received the Flashcom stock sale proceeds.”
In some cases, a person may not be domiciled in California but may still be a resident for California tax reporting purposes. In some cases, the intention of the taxpayer is emphasized in determining California residency.
California Tax Reporter
“Some cases emphasize the taxpayer's intentions when the taxpayer left the state. In Appeal of Rand, SBE, 76-SBE-042, April 5, 1976, ¶205-430, a California domiciliary who was employed in Libya under a contract that required a commitment of at least 18 months, but that had no definite termination date, was outside the state for other than a temporary purpose. Despite his business contacts with California, including bank accounts and rental property, he did not intend to return to California upon completion of the minimum employment commitment. In Appeal of Hardman, SBE, 75-SBE-052, August 19, 1975, ¶205-294, a professional writer domiciled in California went to England to write a screenplay. His one-way ticket to England, use of professional services in the country, and enrollment of his daughter in an English school, indicated that he intended to remain in England indefinitely and he lost his California residency for income tax purposes”
California Tax Reporting:
A California resident filed a California Income Tax Return to report all world-wide income in any given tax year. A taxpayer that has a State filing requirement in multiple states generally files a State tax return in California in any other state in which the taxpayer has reportable income. In most cases the state of California provides a tax credit for taxes paid to the other state and receives a copy of the income tax return filed with the other state. In a year that the taxpayer changes state residency the taxpayer files in both states and reports income in the respective states. In both scenarios, the taxpayer must provide the state of California with a copy of the other state tax return for that year. In past experience, if the state of California is aware of a large taxable transaction and a change of residency in the same taxable year the state will generally examine the transaction and the change of residency.
Summary and Analysis:
In recent years, the state of California has made significant efforts to identify taxpayers that are improperly escaping tax reporting and payment in the state of California. This is primarily due to the high- income tax rates in the state of California and the significant tax benefit received from reporting income in either low or no-tax states. The state of California employs a variety of methods to identify potential under-reporting taxpayers. These include but are not limited to identification of taxpayers with mortgages and financial accounts in CA, comparisons of property tax and DMV records, searches of California professional licenses, and a variety of other methods. In our experience, the most common action by the state is to send a letter indicating that the state believes that a state tax return should have been filed for a given year and ask for a response from the taxpayer. At that point the taxpayer must provide the reason for non-filing.
In all cases, residency is a subjective determination made on a case by case basis.
The following are items that should be considered if the taxpayer chooses to change his State of California residency status.
- Employer documentation supporting the change in the place of employment would support the change in residency.
- The taxpayer should carefully review the residency factors on page one and make as many of these changes as possible as quickly as possible. Items that are easily verifiable should be given special attention. (leases, DMV, professional licenses, etc.)
- Any drivers and professional licenses should be cancelled in the state of California as soon as possible.
- As referred to in the court case on page 2, California residency is assumed until there is proof that residency has been changed. The most obvious indication of a change in residency is proof of residing in the other state through a lease and employment documentation and the replacement of various registrations and licenses.
- As referred to in California tax reporter section, intent is often a factor in residency determination. The move and change of residency should appear to be permanent with no immediate current intention to return to California.
- Time spent in and out of California is a significant consideration in determining California residency. In review of court cases bank and credit card records indicating California purchase transactions are commonly used to determine time spent in the various state. Careful consideration should be given to these types of transactions.
- Any 2017 California source income that triggers a 2017 California income tax filing requirement would provide visibility into the Nevada reporting of the gain and increase potential scrutiny. No 2017 wages or other California income would be ideal.
- The location of the taxpayers’ spouse and children are one of many factors in determining residency. The relocation of the family would be ideal but maybe not possible. Efforts to limit the ability to verify the family location would be helpful. The relocation of the family after the school year would support the intention of the taxpayer to make a permanent change of residency.
As mentioned, a large taxable transaction happening soon after a change in residency may receive scrutiny by the state of California and the determination of residency is mostly subjective and done on a case by case basis. The best defense is for the state of California not to be aware of the transaction. If there is no 2017 taxable income in the state of California there would be no requirement that California receive a copy of a state income tax return. If a large portion of the changes listed in the document are made as soon as possible the change of residency would be a supportable position to take on future years tax returns.
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