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Determining Residency for Income Tax Purposes

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  • 12-01-2016, 10:56 AM
    rico_s
    Determining Residency for Income Tax Purposes
    When a family of four is moving overseas for employment purposes, they sell their house in advance of the move. The house is in Colorado. They close on the contract December 24th 2016, severing all ties to the property, and transport themselves and their belongings to Ohio. In Ohio, they put their belongings in storage with a family member. Over the next month, they stay and visit with multiple family members around Ohio. Three of the family members are continuously in Ohio for that month. The fourth travels back to Colorado for 10 days in the middle of the month to complete employment obligations and stays with a friend. By some arrangement, two of the family's salary-earners are paid from employers in Colorado for the month of January 2017. On January 25th, all family members depart the US for their new home abroad, staying abroad for 3 years. During their time abroad, all mail is routed to an address in Ohio.

    Excepting the last week of 2016, residency for 2016 is clearly the address in Colorado. What is their residency the rest of the time? And what will it be for the purposes of state and federal taxation while they are abroad?
  • 12-01-2016, 01:56 PM
    flyingron
    Re: Determining Residency for Income Tax Purposes
    For the time they are working in Colorado they likely are going to be considered Colorado resident. Once you leave Colorado "never" to return, it ends your residency there. It only matters where the taxpayers are not the dependents (not sure who the others are in this situation). Merely having an Ohio mail drop doesn't establish residency there.
  • 12-01-2016, 02:23 PM
    rico_s
    Re: Determining Residency for Income Tax Purposes
    I just found this from a Colorado document (https://www.colorado.gov/pacific/sit...Income28.pdf):

    Quote:

    COLORADO RESIDENTS IN OTHER COUNTRIES A Colorado resident reporting U.S. federal taxable income must continue to file Colorado returns as a full-year resident no matter how long he or she is out of the country. Most such individuals are working on a temporary assignment, and return to Colorado. Because of this, there is a presumption that people from Colorado working in foreign countries are still Colorado residents. All foreign income that is exempt for federal purposes is also exempt for Colorado purposes. Individuals who abandon their Colorado domicile and become permanent residents of a foreign country no longer have to file Colorado returns. However, they would have to file a Colorado tax return as a nonresident if they had Colorado-source income (e.g., rental income). Such individuals bear the burden of proving their abandonment of Colorado residency. Continued Colorado residency will be presumed if the individual has not severed all Colorado connections; for example, if the individual still carries a Colorado driver’s license, votes in Colorado by absentee ballot, and/or still owns a home in Colorado, or returns to Colorado.
    It looks like Colorado residents would have to take action to sever ties. I wonder if that is the case in other states.
  • 12-01-2016, 02:57 PM
    flyingron
    Re: Determining Residency for Income Tax Purposes
    Quote:

    Quoting rico_s
    View Post
    It looks like Colorado residents would have to take action to sever ties. I wonder if that is the case in other states.

    There are a half a dozen states that make you specifically declare you are abandoning residency. Frankly, I don't see the above really contradicts that. You'll have to file as a residng in the year you move away, but you can exclude your foreign income.
  • 12-01-2016, 05:37 PM
    Taxing Matters
    Re: Determining Residency for Income Tax Purposes
    Since you posted these events as occurring in the future, this seems to me to be a hypothetical situation rather than a real one, making me think this may be more of a homework problem or something similar. Normally we don’t do homework here.

    But I’ll give you some information to get started. Under Colorado income tax law, a person is resident in Colorado if his or her domicile in that state. Your domicile is your place of permanent residence; the place at which you have the most ties and the place to which you intend to return after being away, even if that absence is for a long period of time. Under your facts, the family was apparently domiciled in Colorado through at least 12/24/16. You say that they then sever “all ties to the property” as of that date, which doesn’t tell me a whole lot. Selling a home does not itself mean your domicile in the state has ended. Does the person have an intent to return to Colorado once the foreign work assignment is over? If the answer is yes, then the person is likely still domiciled in the state. Factors that the state will look at as evidence of intent to return include things like: is the person still registered to vote in the state, does he or she still has a driver’s license and/or other licenses in the state, still has membership in a church or other organizations in the state, does the person maintain a home in the state, have other assets in the state, is the person’s permanent employment location in the state and thus where the person will return after the assignment, etc.

    Unless the person cuts off all significant ties to the state, the state may assert the person’s domicile is still Colorado, particularly if the assignment is known to be of limited duration and the person will return to the U.S. afterwards. If the person is a resident of the state (domiciled there) then all of his income is subject to tax by the state. If the person does end domicile in Colorado, then only Colorado source income will be subject to tax in that state thereafter. Note that it is not necessarily the location of the person making the payment of income that determines the source. That varies depending on the type of income. While the employer paying the person may be in Colorado, income for personal services performed is generally sourced where the actual services are performed, not where the employer paying the wage or salary is located.

    The stay in Ohio is clearly just temporary while in transit to the foreign country and never becomes the domicile of the taxpayer here. Simply having a mail drop address in the state does not establish residency or domicile there.

    Finally, for federal income tax purposes, if you are a citizen or permanent resident (i.e. “green card” holder) of the U.S. then the federal government taxes all of your income no matter where in the entire universe you happen to live and no matter where in the universe your income is sourced. You could be living on a colony on Mars and if you are a citizen of the U.S. you will still pay tax to the U.S. on on your income (though you do get a credit for foreign income tax paid on that income). There are a number of special rules that apply to persons who give up citizenship/permanent residents and leave the country (ex-pats) that ensure they do not avoid tax when they leave on income that accrued while in the U.S.
  • 12-02-2016, 06:00 AM
    llworking
    Re: Determining Residency for Income Tax Purposes
    Quote:

    Quoting Taxing Matters
    View Post


    Finally, for federal income tax purposes, if you are a citizen or permanent resident (i.e. “green card” holder) of the U.S. then the federal government taxes all of your income no matter where in the entire universe you happen to live and no matter where in the universe your income is sourced. You could be living on a colony on Mars and if you are a citizen of the U.S. you will still pay tax to the U.S. on on your income (though you do get a credit for foreign income tax paid on that income). There are a number of special rules that apply to persons who give up citizenship/permanent residents and leave the country (ex-pats) that ensure they do not avoid tax when they leave on income that accrued while in the U.S.

    There is also the foreign income exclusion for those who live abroad for a year or more. That is quite significant. Its about 95k now.
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