Why state residency rules matter

State residency rules are the gatekeeper for state income tax liability. States use tests—often a mix of physical presence (days in state), domicile (your permanent home), and ties (driver’s license, voter registration, bank accounts)—to decide whether to tax you on all income, only income sourced to the state, or some pro rated portion when you move mid‑year.

In my 15+ years advising individuals and families, I’ve seen two consistent themes: (1) taxpayers underestimate how quickly a state can assert residency, and (2) good documentation often decides the outcome of disputes. The practical result: your residency classification affects not only your annual tax bill but also withholding, estimated payments, and the risk of audits or amended returns.

How states decide residency: the common tests

Most states classify taxpayers using one or more of these approaches:

  • Domicile: Your legal home—the place you intend to return to and remain. A single domicile usually exists at any time. States look at where you keep your primary residence, where your family lives, and your long‑term intentions.
  • Statutory/Days‑in‑State tests: Many states use a day count (commonly 183 days) to presume residency when you spend more than the threshold in the state. Some states apply an actual day test or look-back rules for part‑year situations.
  • Significant connections/factors test: States weigh ties like driver’s license, voter registration, vehicle registration, location of bank accounts, professional licenses, and social relationships.

No single test is universal. For example, New York uses both a domicile standard and a statutory presence rule; Florida is focused on domicile but has no individual income tax; California considers a broad range of connections in addition to physical presence. Always check the specific state rules (see sources at the end).

What residency status means for taxes

  • Resident: A resident generally owes tax on all worldwide income to that state. That includes wages, business income, retirement distributions, rental income, capital gains—regardless of where the income was earned.
  • Part‑year resident: If you move from State A to State B during the year, each state taxes income earned while you were a resident there. States differ on how they apportion income and what credits they permit to avoid double taxation.
  • Nonresident: Nonresidents are typically taxed only on income sourced to the state (wages earned in the state, rental income from property located in the state, etc.).

Residency also affects eligibility for certain state credits, exemptions, and tax‑free thresholds. Misclassification can leave you paying thousands in unexpected tax or trigger penalties.

Common real‑world scenarios

  • Remote workers: If you live in State X and work remotely for an employer in State Y, you may only be a resident of X (so X taxes you on worldwide income), while Y may assert withholding obligations if your employer has nexus there. Several states enacted temporary rules during the pandemic that still influence how employers withhold taxes for remote employees—check state guidance and your employer’s withholding setup.

  • Commuter/Border workers: If you live in a no‑income‑tax state (like Florida or Texas) but work in a neighboring state with income tax, you usually owe tax to the work state on wages earned there. Reciprocal agreements between neighboring states can affect withholding rules.

  • Mid‑year moves: For clients who move mid‑year, I track the exact move date and allocate income to the correct state(s). Many mistakes occur when taxpayers fail to allocate capital gains, retirement distributions, or business income correctly between two state residencies.

  • Dual residency claims: It’s possible to be treated as a resident by two states. In these cases, credit systems (a resident credit for taxes paid to another state) and interstate agreements can reduce double taxation, but careful computation and documentation are essential.

Documentation: the practical defense against disputes

States rarely accept vague statements of intent. Good evidence includes:

  • Signed lease or deed showing primary residence
  • Driver’s license and voter registration changes dated to the move
  • Utility bills, cell phone records, and property tax bills
  • Bank and investment account statements showing local addresses
  • Employer payroll records and state withholding forms (W‑4 equivalent)
  • Travel logs or calendars noting days spent in each state

When I help clients change domicile, we build a contemporaneous folder with these documents. If a state auditor later challenges residency, this paper trail is often decisive.

Tax planning strategies and considerations

  1. Make the change concrete: To establish domicile in a new state, change your driver’s license, register to vote, update your professional licenses, and take concrete steps that demonstrate intent to remain.
  2. Time moves strategically: If you plan to retire to a no‑income‑tax state, moving before large taxable events (like a lump‑sum IRA distribution or sale of a business) may reduce state tax — but beware of rules that attach tax based on residency at the time of the event or source rules. Plan well in advance and get written tax advice.
  3. Coordinate withholding and estimated taxes: After a move, adjust withholding so you aren’t surprised by tax due to either the old or new state. Employers can withhold incorrectly; you may need to request state withholding changes in writing.
  4. Use credits correctly: If both states tax the same income, taxpayers usually claim a credit on their resident return for taxes paid to the nonresident state. Carefully document the source of the income and the taxes paid.
  5. For business owners: Entity location, where services are performed, and where customers are located can create nexus for state tax purposes. Talk to a tax advisor about apportionment and filing obligations.

Common mistakes people make

  • Assuming a simple day‑count is the only test. States also weigh domicile and connections.
  • Forgetting to update accounts, licenses, and registrations after a move.
  • Neglecting to keep a travel log for partial‑year residency or frequent travel.
  • Failing to coordinate employer withholding or multicity payroll rules.
  • Relying on informal advice rather than state statutes or rulings.

How audits and disputes usually play out

If a state tax agency questions your residency, they will request documentation and may perform a year‑by‑year residency analysis. Appeals usually start with an administrative conference; many disputes settle with reasonable documentation. A small percentage go to state tax court—there, prosecutor‑style evidence of intent and connections matters. Having a CPA or tax attorney involved early often improves outcomes.

Helpful examples and what they mean

  • Example: A taxpayer spends 190 days in State A’s vacation home but maintains a home and family in State B. State A would argue residency under a 183‑day presumption; State B may maintain domicile. Outcome depends on the strength of ties and documentation.
  • Example: A taxpayer moves to Florida, changes driver’s license and voter registration, and sells their home in State C. By documenting the sale, ending local memberships, and establishing new community ties, the taxpayer establishes domicile in Florida and avoids State C’s resident tax on future income.

Who should pay special attention

  • Remote workers and digital nomads with clients or employers across states
  • Individuals retiring to low‑tax or no‑income‑tax states
  • Owners of rental property in multiple states
  • Frequent movers, seasonal residents (“snowbirds”), and those with business nexus in several states

Frequently asked questions

Q: Can I be a resident of two states at once?
A: Yes, both states can claim you as a resident. You’ll usually resolve the overlap with credits for taxes paid, but the process can be complex and may require professional help.

Q: Does owning a house in a state make me a resident?
A: Owning real property is a factor but not determinative. Courts and tax agencies look at the totality of your ties and intent.

Q: How many days can I spend in a state before I’m treated as a resident?
A: Many states use a 183‑day test, but some apply different thresholds or additional rules. Always confirm the specific state’s rules.

Links and resources (internal and authoritative)

Authoritative sources to consult: IRS (general state and local tax information), Tax Foundation state residency guides, and your state department of revenue website for rules and forms. See examples:

Professional disclaimer

This article is educational and general in nature. It is not individualized tax advice. State residency tests are fact‑specific and change over time; consult a qualified CPA, tax attorney, or your state department of revenue for guidance tailored to your situation.