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State Residency Audits – A Quick Guide

As you will no doubt be aware, staying on the right side of the tax man is most certainly in your best interests.

For US citizens all over the country, tax season is one of the most stressful and complex times of the year, though in reality, when it comes to state residency test / audits, you could potentially find yourself being audited by the state, CA FTB, NYS at any time of the year.

State residency audits can be carried out by the IRS at any time, for a whole variety of different reasons, which is why it is so important to seek professional help from a tax expert if you’re at risk of state residency audits.

Get help at 1-877-78-TAXES [1-877-788-2937].

But what exactly is one of these particular audits, what can trigger them, and what precisely do you need to know?

Here is a quick and helpful guide on state residency audits to help make your life that little bit easier.

What is a state residency test / audit? CA FTB - NYS

Being audited by the state is not a nice prospect. In fact, it can sadly keep people up at night and cause them a great deal of stress and anxiety.

A state residency audit is no different, but what exactly is it?

Basically, a state, CA FTB, NYS residency audit is designed to determine whether or not an individual filed as a non-resident or as a part-year resident of the state they allege to reside in.

Take New York for example. As New York residents are taxed on their worldwide incomes, whilst non-residents are subject to tax only on incomes relevant to the state of New York, differences in tax liability can be very significant.

You see, residents of New York also pay tax on worldwide incomes, whereas non-residents will pay no tax to the city at all, even if they happen to work there.

What do state residency test / audits consist of?

The audit carried out by the CA FTB, NYS state representative will typically cover three areas.

To begin with, the auditor will perform what is known as a ‘Domicile Test’ for the first residency test.

Next, the auditor will carry out the ‘Statutory Residency’ test for the alternative residency test, before finally carrying out a test to determine whether or not you allocated your sourced income to the state in question when filing your tax return.

What can trigger state residency test / audits?

Okay, so now that you know a little more about what these audits are, you’ll likely want to do everything in your power to ensure that you are never subjected to one yourself.

Whereas these audits can be random, there are also red flags that can trigger state residency audits, so it’s worth familiarizing yourself with them now, so as to avoid potential stress and anxiety though an audit in the future.

Here are a few red flags which can trigger state residency audits.

Relocating to low or no-income tax states

Certain states in the US have reputations for being high tax states. California and New York for example, get mentioned a lot.

Because of this, more and more people are choosing to pack their cases and relocate to no or low-income tax states such as Nevada, Texas, Wyoming, and even Florida for that matter.

Because of this, high tax states are losing out on incredibly large amounts of tax revenue and the state agency isn’t exactly thrilled about this.

We aren’t talking thousands, or even hundreds of thousands of dollars here, we’re talking millions, and as a result certain states are really becoming more aggressive with their state residency audits.

If for example, you were previously residing in New York and were in the highest income tax bracket, but you decide to move to Wyoming, a state residency audit will be incredibly likely so you should speak to a tax professional if you are planning on moving, to help stay ahead.

Buying multiple permanent abodes

If you’re in the position to purchase several properties, which you register as permanent abodes in different states, your chances of being audited will be much higher than average.

If you currently reside in California but plan on retiring to Florida, but you still own a property in California, which you will still travel to regularly, you would need to be very cautious with the number of days you spend in sunny California.

If you spend more than 183 days there, the FTB state will class you as a resident of Cali and your income will be taxed.

In the eyes of the FTB, you are guilty until proven innocent so it is down to you to prove that you have spent less than 183 days per year in the state, if that is indeed the case.

You may still be audited, though, even if you spend considerably fewer than 183 days in California, so just bear that in mind.

Moving just before selling assets resulting in capital gains

If you’ve a considerably amount of Real Estate, have a profitable business, or have invested wisely in stocks which you are now ready to sell off, if you move to a low/no-income tax state, and then sell your assets, this will likely trigger an audit.

The way to avoid an audit, or simply get through an audit without losing your assets, is to prove to the state agency that the move is indeed legit and isn’t simply a way of trying to avoid paying taxes.

Basically, with audits, if you’ve nothing to hide and can provide proof, you’ve nothing to worry about.

Final thoughts

Remember, when it comes to state residency audits, you are guilty until proven innocent in the eyes of the taxman, so it is vital that you can prove that you’re telling the truth and that you aren’t trying to pull a scam.

Audits are stressful, which is why it is advisable to hire a tax expert and seek out our professional tax services, for peace of mind and to make your life easier if nothing else.

Get help at 1-877-78-TAXES [1-877-788-2937].

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