Frank* was at a loss. Although Frank and his wife had moved to Arizona upon retirement, they had kept a house in Omaha to use for visits to see family and friends who remained in Nebraska. They used their Nebraska house for a few months each year. They also kept up their membership in a few Nebraska organizations, including their church. Frank and his wife did not realize that the Nebraska Department of Revenue would contend that those actions meant Frank and his wife were still Nebraska residents for tax purposes. So, Frank and his wife were facing a significant Nebraska tax bill. To compound that, Frank and his wife were still treated as residents of Arizona for tax purposes as well. Frank’s goodwill towards Nebraska was lost.
Nebraska Law On Tax Residency
Nebraska law establishes that a person may be a resident of Nebraska for income tax purposes if that person qualifies as a resident under one of two tests.
Test 1: Place Of Abode And Presence
Under this first test, a person is a Nebraska resident if that person maintains a permanent place of abode in Nebraska (meaning a house, apartment, condominium, etc.) and spends in the aggregate more than six months of the taxable year in this state. A person need not spend more than six months of the year at their place of abode, as this test can be met by their presence anywhere in the state. So, if a person rented an apartment in Lincoln, stayed at that apartment for five months, and was not otherwise present in Nebraska, that person would not be a resident under this test. If that same person worked in Scottsbluff for two months, and thus was in Nebraska for seven months in the year, that person would be a resident.
Test 2: Domicile
Under this second test, a person is a Nebraska resident if that person is domiciled in Nebraska. The Nebraska Supreme Court has stated the following in regards to domicile:
“Domicile is that place where a person has his true, fixed, and permanent home. In order to effect a change of domicile there must not only be a change of residence, but an intention to permanently abandon the former home. The mere residing at a different place, although evidence of a change, is, however long continued, per se insufficient.”
The Nebraska Supreme Court has further stated: “No exact definition can be given of domicile. It depends upon no one fact or combination of circumstances, but from the whole taken together, it must be determined in each particular case.”
If A Person Moves Out Of Nebraska, That Person Must Prove Abandonment Of His Or Her Former Nebraska Domicile
As noted above, the Nebraska Supreme Court has stated that a person must abandon their former domicile to change their domicile. Furthermore, some courts have held that, if facts are conflicting regarding domicile, there is a presumption in favor of the original or former domicile, as opposed to the new one. These legal provisions are often referenced by the Department when reviewing tax residency questions.
Declaration Of Abandonment: Telling The Story Of A Former Resident’s Intent To Leave Nebraska
In certain circumstances, it can be difficult to document or establish a specific time in which former residents abandoned their Nebraska domicile. This can lead the state tax authorities to believe that abandonment never occurred.
So, for clients who are considering leaving Nebraska to establish domicile elsewhere, the execution of a Declaration of Abandonment will be very helpful in establishing the intent of those clients to abandon their Nebraska domicile. We suggest that such a Declaration be designed and drafted to create a dated evidentiary record of our client’s intent to leave Nebraska as of a certain date. The Declaration is individualized for clients, to tell the legally defensible story of their departure from Nebraska. Each Declaration will be supported by facts and circumstances existing on the date of abandonment. The Declaration will be signed and notarized to establish our client’s intent on that date.
This Declaration is intended to help clients document and establish their “abandonment” of Nebraska as their place of domicile.
Factors For Domicile
The Department of Revenue, in an Information Guide, has stated that the following factors are relevant in determining a person’s domicile:
- 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 you are present in Nebraska;
- The size, value, and nature of your Nebraska residence compared to your out-of-state residence;
- The location of your employment, business connections, and professional licenses;
- The physical location of items that have significant sentimental value to you;
- Your social, community, and family ties in both locations;
- Where your minor children attend school or daycare;
- Where your doctors, dentists, accountants, attorneys, bankers, and other professionals are located.
These factors are apparently based on an interpretation of factors applied at common law by courts.
In addition to these factors, we will often review the following facts as potentially relevant to the question of residence:
- Statements in Estate Planning documents;
- Location of burial plots;
- Obtaining resident hunting or fishing licenses;
- Where an individual spent his or her holidays, both secular and religious;
- Type and value of cars in your new state, compared to your cars in Nebraska;
- Membership in clubs, civic organizations, and religious organizations.
The Nebraska Supreme Court has established that one factor is of the most importance: registering to vote and voting. The Court has stated: “Of all the formal acts to be scrutinized in ascertaining a person’s domicile, undoubtedly the act of registering and voting is the most important, and, while not necessarily conclusive, it is usually most convincing and persuasive.”
Because There Are Two Tests, A Person Can Be A Resident Of Two States For Tax Purposes
Nebraska law mandates that a person is a resident of Nebraska for tax purposes if that person meets either of the tests to be a resident. Many other states have a similar law, where a person can be a resident of a state if that person meets just one of two tests to be a resident.
These laws mean that a person can be a resident of two states for tax purposes. This is usually not the position that a person wants to be in.
Common Issues For Former Residents Who Return To Nebraska For Visits
We know that many long-time residents of Nebraska wish to leave Nebraska upon retirement for warmer climates. Many of those former residents will keep their house or other place of abode in Nebraska, to use in visiting family or friends that remain in Nebraska. Furthermore, many of those former residents will keep other connections to the state, including membership in social and religious organizations.
Even though these former residents are present in Nebraska for less than six months in a given year, the Department often claims that the maintenance of a Nebraska house and other connections to Nebraska means that the person is still domiciled in Nebraska. That can lead to an income tax assessment from the State of Nebraska, on the basis that the person is a resident of Nebraska for tax purposes. We are handling many of these cases now.
Steps You Can Take To Get Out Of Nebraska (For Tax Purposes)
So, how can a person end their Nebraska residency for tax purposes? The concept of domicile is extremely fact sensitive and dependent. So, short of disposing of their Nebraska residence and never coming back, there can be no guarantee that a person will not retain their Nebraska residence for tax purposes. But, certain steps can be taken to minimize the likelihood that a person will retain their Nebraska residence. These steps include:
- Declaration Of Abandonment. As explained above, this Declaration establishes the date that a person abandoned their Nebraska domicile and the story behind their move.
- Register To Vote, And Vote, In Your New State. To the extent possible, keep records of these actions.
- Make Sure You Are Not In Nebraska Over 6 Months. Being in Nebraska for over 6 months in a year, when you maintain a permanent place of abode in Nebraska, will automatically make you a Nebraska resident for tax purposes. Furthermore, time spent in Nebraska is a factor in the test for domicile. Therefore, for Nebraska tax purposes, the less time spent in Nebraska, the stronger your position that you are not a Nebraska resident.
- Move Your Items Of Sentimental Value To Your New Home. This factor can, at times, be significant in questions of domicile.
- Get A Driver’s License In Your New State, As Soon As Possible. This is a factor in the test for domicile. It can also help you establish the date that you moved from Nebraska.
- Register Your Cars In Your New State. Again, this can help you establish the date that you moved from Nebraska.
- Keep The Rolls Royce At Your New Home. People tend to keep their nicest car at the place they consider their true home.
- Keep Good Travel Records And Credit Card Statements. You may need to document your location throughout a past year, for up to several years prior. Don’t rely on memory alone for this. Travel records, receipts, and credit card statements can be strong proof of your location.
- Use Professionals In Your New Home. The Department believes that the location of your doctors, dentists and other professionals helps to show your true home. To the extent possible, use professionals in the location of your new home.
- Be Consistent With Your Statements Of Residency. Make sure that you are consistent about stating where you live. Don’t try to avoid jury duty in your new location by claiming you are a Nebraska resident. 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 part of the facts in a potential tax case.
- Don’t Overlook The Impact Of Family Entities. If you have an entity in Nebraska, such as a family LLC, do not serve as a Nebraska registered agent for that entity. Individuals who serve as registered agents in a state are potentially making a declaration that they are residents of that state.
- Get Involved In Your New Community. If you maintain affiliations with several Nebraska clubs or organizations, but you do not join anything in your new state, that will be a factor against your residency in the new state.
- Consider Charitable Giving. Believe it or not, the Department of Revenue has, in certain circumstances, treated a person’s charitable giving as relevant to the determination of their residency. Therefore, we recommend that persons who are charitably inclined consider giving to charities in their home state (as well as Nebraska).
Make Responses With The End In Mind
Former residents generally receive notice that the Department is reviewing their residency status by first receiving a questionnaire from the Department of Revenue. The responses to this questionnaire will often determine whether the Department issues a tax assessment to the former resident. Furthermore, the information disclosed in the questionnaire will often become a key part of the Department’s case, should an assessment be issued.
Given its importance, we strongly recommend that former residents work with an experienced Nebraska state tax professional in responding. If you or a client is facing a Nebraska income tax case based on residency, including if they have received a questionnaire from the Department of Revenue, please contact a member of the McGrath North Tax Group to discuss.
* Names have been changed to protect client confidentiality.