Do you know the difference between a domicile and a residence? If you and your spouse are living apart understanding the difference will help you avoid unnecessary taxes.
Long-distance marriages are on the rise. The number of married couples who live apart more than doubled between 1990 and 2015 to 3.5 million couples, according to the U.S. Census Bureau.
With proper planning, spouses who live in different states can avoid paying unnecessary state taxes. The spouse who moved should first determine whether his or her domicile has changed. Domicile and residency aren’t always the same. An individual may reside in multiple states, but can have only one domicile — that taxpayer’s fixed, permanent home.
Individuals domiciled in a state are automatically considered state residents for tax purposes. Usually, this means the state is entitled to tax that spouse’s worldwide income. Given the differences in state taxes, this can have major consequences for a couple’s finances.
Consider a hypothetical couple, Jack and Anne, who lived in Georgia. Anne accepts a job offer in Florida, but Jack doesn’t relocate because he is caring for an ailing parent. Anne moves to Florida but will spend most weekends with her husband.
Because Florida does not tax income, it would be beneficial for Anne to establish herself as a Florida resident. She would then only owe Georgia tax on any income she earned in Georgia — possibly none, depending on how she and Jack have set up their finances. However, to effectively establish Florida domicile, Anne will need to avoid several potential pitfalls, especially since Georgia’s tax authorities have a strong motive to prove that she remains a Georgia resident.
Anne should first check Georgia’s and Florida’s residency rules. Georgia law says that individuals who spend more than 183 days per any continuous 12-month period in Georgia are automatically residents.
Since she’s in the state only on weekends, she should be okay. Nevertheless, Anne should keep a careful record of any time she spends in the state, along with receipts, travel confirmations and other evidence of her movement.
Besides your presence in a state, the other major factors in establishing a change in domicile are demonstrating intent to remain in the new state and to abandon your former domicile. These are harder to prove than physical presence, and there is no one factor that tax authorities consider conclusive.
Given that Jack remains in Georgia, Anne will have to work especially hard to prove her intentions, but doing so is not impossible. Steps might include:
While no one action will make or break a domicile claim, taxpayers are wise to offer as much evidence as possible to tax authorities.
If Anne can make a convincing argument for Florida domicile and her situation doesn’t trigger statutory residency in Georgia, she may not need to file a Georgia state income tax return at all. (If she has income sourced to Georgia — or any other state – she will still need to file a return as a nonresident.)
Whether Anne files as a nonresident or does not file in Georgia at all, Jack will need to file his state return as “married filing separately,” even if he and Anne file a joint federal return. To do this, Jack should prepare a mock “married filing separately” federal return. He will not file this mock federal return but will use it to prepare his state return so that only his income and his half of the federal deductions are included.
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In some cases, the resident spouse may still want to file a joint return, in order to secure more favorable rates, or certain credits or deductions. However, some states require spouses living in different states to file separately. It is best to consult a tax expert about the most beneficial way to file. At a minimum, you should make sure you know what your home state legally requires.
You may not be able to avoid filing for both spouses, regardless of residency concerns, if either of you lives in a community property state. Such states may require you to share and then split family income evenly. If either spouse lives in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington state or Wisconsin, both individuals should take special care to understand the rules. This may be a case where you need to consult a tax professional.
If either spouse must file as a nonresident, either because of community property rules or to report income sourced to the nonresident state, reciprocity agreements between the states in question may have an impact. Some states have agreements that allow workers to pay taxes only where they live, not where they work. This can be valuable when tax rates vary significantly. Whether such agreements apply will depend on a couple’s particular situation, but it is important to make sure you know what options are available.
Be aware of sensitive areas of state tax law. They can cost you.
For example, in Anne and Jack’s case, the couple will have to take care if Anne plans to claim a homestead exemption on her Florida residence. Because the exemption is a valuable one, Florida tax authorities tend to take fairly aggressive positions as to who is eligible to claim it.
Florida allows only one homestead exemption anywhere per individual or “family unit.” In a 2016 court case, a wife claimed an exemption on a home she solely owned in Florida, while her husband claimed a homestead exemption for a home he solely owned in Indiana. Each spouse was a legal resident of the state where they claimed their respective exemption.
However, the court found that because the couple comingled their finances, the wife was receiving the benefit of her husband’s exemption, even though she did not jointly own his Indiana house. Instead of claiming homestead exemptions in both states, Jack and Anne should decide which exemption is more valuable and forgo the other one.
Especially for long-term separations, you may also need to consider the potential impact on your estate planning because some states impose own estate or inheritance taxes. Jack and Anne are lucky; neither Georgia nor Florida imposes such a tax.
However, 12 states and the District of Columbia do impose estate tax, and six states impose an inheritance tax. (Maryland has both.) Washington state levies an estate tax and is also a community property state, which could complicate planning even further. While there’s now a very high threshold for federal estate tax, some states have much lower thresholds that affect far more couples.
It is smart to discuss your plans with your attorney, your financial planner and any other professionals you have involved in your estate plan to keep them up to date with your dual residency. They can warn you about any potential issues and suggest methods for working around them if possible.
Rebecca Pavese, CPA, is a financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office.
Palisades Hudson is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. The firm’s Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at www.palisadeshudson.com.