Determining US domicile: How to navigate federal and state rules

The concept of domicile is a relatively familiar one in the UK. Increasing scrutiny by HMRC has done much to promote awareness of its importance when determining income, capital gains and inheritance taxes. 

Less widely appreciated is that domicile is also a critical concept in the US – even if its precise meaning in the context of US taxes differs from the concept in the UK. (Here, as ever, the nations remain divided by a common language.)

US federal and state authorities each have their own tax rules and different concepts of domicile. As in the UK, it is accepted that an individual should have only one domicile in the US at a time, which is presumed to continue until they acquire a new one. 

As in the UK, too, this domicile will have a significant role in determining an individual’s liabilities under various taxes.

Federal domicile

At the federal level, US citizens are always considered US-domiciled. For others, domicile is essentially defined as where the individual intends to make their permanent home. Obtaining a green card, for example, brings a presumption of US domicile. That will be definitive where the individual resides in the US, though it will only be an important factor and not definitive for those living outside.

Those who are neither US citizens nor green card holders can still be considered US-domiciled based on their individual circumstances and intentions. A range of factors will go towards determining domicile:

• The amount of time spent in the US and elsewhere
• The individual’s intentions regarding remaining in the US
• Their ability to remain living in the US
• The location of their principal residence
• The residence of their immediate family
• The location of personal items, such as pets, artwork and cars
• The location of their business activities and investments,
• Their voter registration and drivers’ licence
• The location of their social clubs, membership
• Doctor and dentist information

At the federal level, an individual’s domicile is relevant only for estate and gift taxes. It has no bearing on their income tax. The US/UK estate tax treaty can be used where an individual is domiciled in the US and is also regarded as domiciled in the UK by HMRC. Other countries also have estate tax treaties in place with the US: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, South Africa, and Switzerland.

State domicile

In addition to determining domicile for US federal taxes, individuals must consider it separately for state taxes. An individual’s domicile status can be pertinent for state income tax, state estate tax or both (depending on the relevant state’s rules).

Estate and income tax treaties do not always apply at the state level. At the same time, tension can arise when an individual declares to HMRC that they are domiciled in a specific state (and hence non-UK domiciled) whilst also claiming to be non-domiciled in that state for local tax purposes.

While it is only possible to have one domicile at a time under US law, it is possible to be a resident of more than one place at a time. For individuals who move frequently, understanding their domicile position is critical, but can also be complex.

Some states have a legal, codified definition of domicile; others rely on relevant case law. Generally, state domicile is understood to be where an individual intends to remain for the foreseeable future and return to if they leave for a short period of time. Accordingly, state rules generally consider the same factors that helped determine federal domicile. The main difference is that US citizenship or green card status is unimportant. 

In short, an individual’s state domicile will generally be the state they call home. This is not always the case, however, and care is needed when considering state-level domicile.

A common challenge individuals face is proving a new domicile when moving from one US state to another. The move is usually enough to demonstrate that someone has abandoned the former and acquired a new domicile in the new state of residence – but not always. Tougher rules apply for those moving abroad from a US state.

US citizens frequently move to a foreign country, often the UK, on work visas. Many US States will argue that because the visa is conditional (usually on employment), the individual does not have the right to remain there permanently. Consequently, they cannot establish a new domicile in the UK.

As previously stated, the rules vary between states. Taking an example, however, helps illustrate the complexities that can arise.

An example: New York State domicile and residency rules

New York State defines domicile as where an individual’s true home is. It has a dedicated department focussing on state domicile and residency audits. This takes account of the following factors when determining domicile:

• Where an individual’s home is considered to be;
• Where they spend the majority of their time;
• Whether they have an active business involvement or employment in New York;
• Where the individual’s personal items, with monetary or sentimental value, are located;
• Where an individual’s spouse and minor children live.

In considering the first of these points, the department will take account of the comparable size and nature of the use of an individual’s New York and non-New York properties; where an individual spends family holidays and special occasions; whether properties are owned or rented; what actions the individual has taken to remove themselves from the previous domicile; and whether they have established new personal and economic ties in the new jurisdiction.

Being domiciled in New York will mean an individual is subject to its estate tax upon death. It will also mean they are considered resident in the state and subject to income tax on worldwide income and gains. However, there are exceptions to this that allow individuals to be considered non-resident for income tax purposes, despite remaining New York domiciled. To qualify, an individual must satisfy the conditions of one of two groups, categorised by the state as Group A and Group B.

Group A 

• To qualify under Group A, the individual must satisfy three conditions:
• They did not maintain any permanent place of abode in New York during the tax year.; 
• They maintained a permanent place of abode outside New York during the entire tax year.;
• They spent 30 days or less in New York during the tax year.

Group B

Under Group B, there are also three conditions: 

• The individual was in a foreign country for at least 450 days during any period of 548 consecutive days.; 
• They, their spouse (unless legally separated), and minor children spent 90 days or less in New York State during this 548-day period.
• During the non-resident portion of the tax year in which the 548-day period begins, and the non-resident portion of the tax year in which it ends, the individual was present in New York State “for no more than the number of days which bears the same ratio to 90 as the number of days in such portion of the tax year bears to 548”, as the New York State Department of Taxation and Finance puts it. 

The last of these requirements may appear particularly complicated. In practice, it means that in the calendar year of departure from New York or return to it, the number of days allowed in the state is equal to the number of days in non-residence during that year divided by 548 times 90.

For the purpose of both Group A and Group B, any part of a day spent in New York State is considered one full day.

Not only are the rules complicated, but their operation is regularly challenged in the courts. Individuals are advised to stay on top of recent case law. Moreover, this example relates to New York state alone. Rules differ markedly between states. In some, domiciled individuals are automatically tax resident without exception. In others, tax residence is based entirely on objective factors such as days of presence.

Wherever an individual has any doubt about their US domicile position, either at the federal or state level, they should seek advice.