Moving abroad? A visa may not be enough to change your state tax home

TAX ALERT  |  January 25, 2021

Recently, the Nebraska Supreme Court affirmed a lower court’s decision finding that a Nebraska couple failed to prove a change in domicile to the U.K. The decision is yet another example of the state tax complexities involved in changing one’s residency. With the increase in remote working arrangements due to the COVID-19 pandemic, many individuals and families have considered relocating to warmer climates, cheaper communities or even abroad. Doing so without, proper planning can become an expensive mistake. 

The case

The taxpayers were assessed over $70,000 of individual income tax, penalties and interest for the 2012 through 2014 tax years. The taxpayers were residents of Nebraska through December of 2011 when they moved to the U.K. For the period at issue, the taxpayers filed their Nebraska income tax returns with their U.K. address and computed Nebraska tax using a nonresident schedule. In 2012, the taxpayers filed a form with their 2012 Nebraska tax return to elect special capital gains treatment, which required declaration that the capital stock qualified for the election – an election only available to a resident individual of Nebraska. The taxpayers were also taxed as U.K. residents and employed both accountants in Nebraska and the U.K. 

The taxpayers maintained two Nebraska properties during the period, one their primary residence before moving overseas, and the other as an investment property. Both properties were subsequently sold after the period at issue. No property was owned in the U.K.

In 2011, the taxpayers received permission for a ‘Tier 2’ visa that included an expiration date. That visa was extended and the taxpayers ultimately became British citizens in 2018 after completing all the necessary physical presence and residing requirements. During the period at issue, the taxpayers returned to Nebraska for varying lengths of time, including as many as 40 days in 2012. 

Also during the period at issue, the taxpayers maintained a driver’s license in several states, including Nebraska, and in the U.K, and voted in the 2012 U.S. presidential election. Before moving to the U.K., the taxpayers resigned their country club membership and sold their vehicle. A new club membership was established in the U.K. in addition to new vehicles purchased. Neither taxpayer had Nebraska bank or financial accounts. 

The Nebraska Tax Commissioner noted that the taxpayers did not have a right to remain in the U.K. because their visa included an expiration date, and therefore could not have abandoned their Nebraska domicile. It was also noted that the taxpayers maintained their Nebraska real estate until they received more permanent U.K. status – essentially allowing for a backup plan if residency was denied. Finally, the taxpayers had issued a sworn statement of Nebraska individual residence for the 2012 special capital gains election also suggesting the U.S. domicile was not abandoned. 

The Nebraska Supreme Court noted that establishing domicile requires both presence and an intent to remain at the new locality. The Supreme Court agreed with the lower court that the facts did not substantiate the required intent of the taxpayers to change their domicile to the U.K, primarily because of the 2012 tax return and the maintaining of Nebraska property. Additionally, the initial U.K. visas for the years in question demonstrated that the taxpayers intent to remain indefinitely in the U.K. was inconsistent with U.K. law. 

Takeaways

Changing domicile can be complicated. It is rarely a straight-forward endeavor because the burden of proof to demonstrate the change is on the taxpayers. The Nebraska decision emphasizes the importance of due diligence when considering moving to a new state or to a foreign country. While some of the taxpayers actions did evidence a permanent intent to relocate, courts will consider all of the facts and circumstances of a relocation in the aggregate. When residency planning, taxpayers should note that more than an internet search is required. 

As the court noted, a determination of intent is fact specific. Other facts that may give rise to a determination of residency are length of stay, owning or leasing property, where medical care occurs, and location of family and even pets. No one factor is determinative, and even seemingly less significant facts may be why a taxpayer fails to prove their intent to relocate. Planning for a relocation is essential.  

Finally, general residency planning should consider all state and local tax burdens, including property taxes and sales and use taxes. Taxpayers should also consider the impact of residency changes on social security benefits, pension income, retirement plan distributions, inheritance taxes and other estate and gift tax obligations. 

Taxpayers considering relocation should consider a comprehensive residency review in order to minimize continued state and local income tax exposure in their prior location.