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Tax Time Bombs: Residence, Domicile and Why You Need to Care

May 9, 2017 // R. Shawn McBride // No Comments »

 

R. Shawn McBride recently spoke about the difference between residence and domicile. Here is the transcript: https://www.facebook.com/rshawnmcbridepublic/videos/1470800639618504/

 

Good morning, folks. R. Shawn McBride with you here, live, talking about tax time bombs and why you need to care. Recently, coming up in a conversation about, “What state do you want to incorporate? What state do you want to live in?” The issue came up about residence and domicile. All of you know that my world is about planning, making companies that stand the test of time, building companies that really help the business owners fulfill their lives and their dreams. Sometimes part of that is planning and executing, minimizing your state income taxes, and locating where you really want to be.

The residence and domicile issue always sits there at service. What is the difference between residence and domicile? Many people informally use these words similarly. People don’t just tend to distinguish them. Your domicile is your true home where you intend to return to. It is essentially where your home base is. When you set up a domicile – that is where you’re going to return to. It’s your long-term home. Then you can have residences, which are places where you’re present, and that you have connection to. You can only have one tax domicile, but you can have multiple residences. This is what causes a lot of confusion. People get confused about that.

You possibly could be a resident in more than one state, and liable to pay state residency taxes in that state. And to add on top of it, if you don’t extinguish your domicile, you could still owe taxes to another state which you’re domiciled in. You could be residing in state A, and have your domicile – intend to return to state B, and you would owe taxes to both state A and B. There are some tax credits that offset this income so you don’t get completely double-whammed in most cases, but you’re paying a lot of taxes, so you want to be very careful about this.

Your domicile is your true home where you intend to return to, so you want to be careful about how you structure that, how you set that up. Your residence is the place where you’re spending time, you’re spending connecting with. The two of these are different concepts, and if you’re going to change your domicile, you need to do so very carefully. A lot of states tests out there about what it means to change your domicile, where your domicile is, and they’re looking at what actions you’ve taken to show your real intent to reside in a particular location, and where you intend to remain. They’re looking at a lot of factors here. Where your car is registered. Where are you spending your time? Where are your social connections? Where are you going to church? Where are your friends? Where are your significant amount of assets? Many, many tests on domicile.

Point being, if you want to change your domicile, make sure you break a connection with a state and you no longer owe them state income taxes. You want to very carefully extinguish your domicile. Your residence is a different question. That’s often about keeping a place in a state, and physical presence, amount of time you spend there. There are two different tests, and you want to be very careful you understand both, because a lot of people get caught on this. They do not distinguish their domicile. They change their residence. By changing their residence, they’ve exposed themselves to taxation in a new state. But if they don’t extinguish the domicile, they still may owe taxes to the original state, so you want to be very careful about how you interplay all this.

Hope that’s helpful, folks. Hope that helps you execute some of your plans and start thinking about what you want to do in the future, particularly if you’re thinking about moving yourself or your business, you’re going to be thinking carefully about these issues. Let me know if I can help you with anything. Love to join you and your groups and help you execute your plans and talk about how to make plans that really work, The Three Laws of Empowerment. If you have a group or an audience that’s looking for that type of message, please reach out to me.

Make sure you like the R. Shawn McBride public fan page. Spread the word. Let your friends know that we’re here to help, and let me know how I can help you. Feel free to send me private comments and emails, and we’ll talk soon. R. Shawn McBride, signing off.

Make sure you download our free checklist to assess your business:  www.mcbrideforbusiness.com/BlogGift

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique.  Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Ulrik De Wachter.

 

About the Author

R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment (www.rshawnmcbridelive.com/3laws), gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at info@mcbrideforbusiness.com or (214) 418-0258.

 

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