The question of whether a taxpayer is subject to tax in a state is complex. The answer for a company, and the facts needed to reach that answer, differs from those for an individual. 

In this article, we’ll review whether an individual is subject to tax as a resident. In our recent experience, this topic has generated significant controversy with the Nebraska Department of Revenue. This is particularly true when long-time residents choose to spend part of their time in the state they are moving from.

We have written on this topic before and are revisiting this for two reasons. First, the question of tax residency has led, and we believe it will continue to lead, to numerous disputes between taxpayers and the Department of Revenue. 

Second, since there have been a number of new cases on this topic, we can identify additional factors that those courts have highlighted as important in the determination of tax residency. Understanding those additional factors could make the difference in results for you or your client.

While this question applies to all states with an income tax, we are limiting our discussion here to just Nebraska. This question applies whether you are leaving Nebraska or leaving another state to come to Nebraska.

Nebraska’s Rules on Tax Residency 

As long-time Nebraskans, we never like to see people leave our great state. However, we know that many choose to leave Nebraska for a variety of reasons. Often, those people retain certain connections to Nebraska, including a second home, an ownership or leadership position with their company, or other personal or family ties. This presents a combination of facts that often confuses the question of which state is their true state of residency. 

Nebraska tax law establishes that a person will be deemed to be a Nebraska resident if either of two tests apply. We have called these two tests the Presence Test and the Domicile Test.

Presence Test
A person remains a Nebraska resident if that person maintains a permanent place of abode in Nebraska (meaning a house, apartment, etc.) and spends, in the aggregate, more than six months of the year in Nebraska. 

This test is the most clear-cut of the two. Either a person factually meets both conditions or they do not. Of note with this test, motivation for a person’s presence is irrelevant. Whether here for family, medical or business purposes, if a person meets both factual conditions, then they are a Nebraska resident for income tax purposes. 

Domicile Test
A person is also deemed to remain a Nebraska resident if that person is domiciled in Nebraska. Our Nebraska Supreme Court has stated: “The question of domicile is a question of fact rather than law, frequently depending upon a variety of circumstances. The term domicile shall mean the place where an individual has his or her true, fixed, and permanent home and principal establishment, and to which whenever he or she is absent he or she has the intention of returning. Actual residence is not necessarily domicile.”

The Nebraska Supreme Court has further stated: “The requirements to establish and change a domicile are settled. To acquire a domicile by choice, there must be both (1) residence through bodily presence in the new locality and (2) an intention to remain there. All of the surrounding circumstances and the conduct of the person must be taken into consideration to determine his or her domicile. To change domicile, there must be an intention to abandon the old domicile. To establish a new domicile, the present intention must be to remain indefinitely at a location or site or to make a location or site the person’s permanent or fixed home.”

Unfortunately, this legal standard—based on intention—leaves a lot of wiggle room for Nebraska to tax you as a Nebraska resident. Courts cannot read a person’s mind, so intent is determined based on the review of a number of facts regarding the person’s location.

Domicile Factors Established by the Department Itself 
In its information guide titled “Determining Residency Status for Nebraska Individual Income Tax Filing,” the Department has identified a number of factors that it will examine to determine domicile. These include the following:

• Purchasing a home in another state for use as a principal residence;
• Paying taxes as a resident of another state;
• Obtaining a driver’s license as a resident of another state;
• Registering a motor vehicle as a resident of another state;
• Voting in another state;
• The number of days a person is present in Nebraska;
• The size, value, and nature of a person’s Nebraska residence compared to his or her out-of-state residence;
• The location of a person’s employment, business connections, and professional licenses;
• The physical location of items that have significant sentimental value;
• A person’s social, community, and family ties in both locations;
• Where a person’s minor children attend school or daycare; and
• Where a person’s doctors, dentists, accountants, attorneys, bankers, and other professionals are located.

Additional Domicile Factors Cited by Nebraska’s Courts
In addition to the domicile factors cited by the Department, Nebraska courts have also identified the following additional factors they will consider in determining domicile:

• Addresses used for mailing and official purposes;
• Medical reasons for presence in a jurisdiction;
• Direct evidence of intent;
• Jurisdictions in which the person paid taxes as a resident;
• Jurisdictions in which a person operated a business;
• If a person leaves the country, the nature of their visa in the new country (and whether it is permanent);
• If a person travels outside of Nebraska, the location where they generally start and stop their travels;
• Statements on a person’s estate planning documents; and
• Location of burial plots or other funeral arrangements.

Main Steps to End State Tax Residency

Given all of these, how can a person end their state residency for tax purposes? As documented previously, the strict legal test of domicile is extremely fact sensitive. Precise recommendations on steps for a person to take to change their domicile depend on the particular fact situation of that person.

However, several critical steps that should commonly be taken include the following:

• Spend Time in Your New State. The Department looks carefully at the location where a person spends their time. We suggest spending as much time as possible in your new state (and no more than six months in your old state).
• Vote in Your New State. The Nebraska Supreme Court has established that voting is a factor of particular significance in determining domicile. A person should register to vote, and vote, in their intended state of domicile. The person should also keep a copy of his or her voter registration and a log of elections voted.
• Sentimental Items. Move these to your new home (and keep a list of the sentimental items).
• Driver’s License. Change your driver’s license to your new state.
• Travel Records and Credit Card Statements. Keep a log of your time in Nebraska and elsewhere. Travel records and credit card statements are very helpful to establish the location of a person throughout the year. In addition, people can download apps to their phone that help keep track of a person’s location.
• Estate Planning Documents. Execute new wills, financial powers of attorney, and health care powers of attorney that designate your new state of residency.
• Community Involvement. Become involved in the community and recreational organizations in your new state. Consider whether to terminate your memberships to such organizations in Nebraska (as the Department of Revenue may use these against you).
• Support Charities in Your New State. The Department of Revenue will try to use your charitable gifts and support to determine residency. So, consider supporting charities in your new state.
• Consistent Statements of Residency. Be consistent with your change of residency. For example, don’t try to qualify for a benefit by claiming Nebraska residency. Assume that all of your statements on residency, in whatever form, will become facts in a potential tax case.
• Business Owner Planning. A variety of special, specific actions are needed for business owners. These can include how the business is owned and managed, among other factors.

Declaration of Abandonment

As noted by the Nebraska Supreme Court, to change domicile, there must be an intention to abandon the old domicile. The same is true of other states. To help document this intention, we have developed a Declaration of Abandonment that we utilize with our clients to help them document both the date they intended to change their domicile as well as the steps they took to do so. This Declaration is an action that can be taken at the time a person wants to establish new tax residency that could potentially help establish to the Department of Revenue that the person did, in fact, abandon their previous domicile.  

Recommendation

In general, as with most tax questions, the best way to realize the results you or your clients want is to address the question before your clients move.

If, however, your clients find themselves on the receiving end of a review notice or questionnaire from the Department of Revenue, be sure the legal standards and precise facts are thoroughly considered before responding. Assume the responses will be Exhibit A in a tax case. The reply to the Department of Revenue should never be done hastily or taken lightly.