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The concept of your "domicile" dates back to Old English Common Law, but it may have a very current and significant impact on your level of state taxes. Your domicile is the place you consider to be your permanent home. You can have many residences, but you can have only one domicile. The ultimate determination for tax purposes will depend in large part upon the use of the residence as a home, the use pattern in terms of “lifestyle” and family, and the taxpayer's intent. Generally, the place where the family as a whole considers its home to be is the “marital domicile.” It is very unusual that a husband and a wife have separate domiciles. Also, children will attend school in the state of domicile of the parents. The state tax auditor will focus on the taxpayer's overall living pattern, volunteer activities, leisure activities and the like.

In an actual case, a New York couple hung a Modigliani painting in their New York City Park Avenue apartment for eleven years, changed their domicile to another state in December, and sold the painting at auction the following May for $8.5million (a $7million gain). The state sought to impose the income tax on the gain because of the location of the artwork at the time of its sale. The painting remained in the City pending its transfer to the auction house while renovations were being made to the new home out of state. Because the couple had clearly established a change in domicile before the beginning of the year the painting was sold, the state lost the case.

Amper Observation: Only because the couple had clearly proven a documented change of domicile could they prevail. Had the couple not shown a clear and permanent change of their residence, the tax would have been imposed on the gain.

Tax on stock options exercised is another area where clients should consult with their tax advisor about a state tax “paper trail.” Most states tax stock option income in the year of exercise - taxing the excess of market price over the exercise price. When a taxpayer changes his domicile from one state to another, he or she may have worked in one state but exercised the option in the new home state. In that event, some states use a “grant-to-exercise” allocation period. If the taxpayer had worked for any length of time in the state where the option was earned, and returns to that state, he or she may be called upon, years later, to determine what days were worked outside of the state during the interim years the options were held. A former resident, of course, may not have any purpose for maintaining such records.

Amper Observation: In both the state where the income was earned and the state where the option is exercised, the taxpayer is required to document the days that are not taxable.

These are just a few of the many instances that show the amount of state taxes an individual pays when changing domicile may have as much to do with his or her record keeping as with what is the “right” or “wrong” amount of tax. The obligation of the taxpayer is to effectuate a clear and convincing “paper trail” in order to obtain optimal tax results. This effort can and should be supported and guided by your tax advisor.