Residency/domicile is a critical issue in a state-tax analysis because, as a general principle, a state taxes its own residents on all their income from whatever sources it is derived (typically with a credit mechanism for some or all tax paid to another state on that same income). However, regardless of residency and regardless of whether the individual has any physical presence in the state, a state may also tax a nonresident upon income that has a “source” in that state. The devil is in the details, and the tax law of each state is filled with unique pitfalls and traps for the unwary regarding their definitions of residence, domicile, and source income.
In the October issue of the Journal of Financial Planning, Senior Counsel Eric Coffill discusses five recent decisions, from five different states, that illustrate some of the common issues and general principles encountered in analyzing and planning for residency/domicile and source income issues.