Key Considerations for State Tax Residency Planning as Policies Evolve

Amid ongoing shifts in state tax policy, ultra-high-net-worth individuals are increasingly focused on how residency planning may influence overall tax exposure, particularly in the context of liquidity events and geographic transitions.

In our recent fireside chat, Yoni Fix, Partner and State & Local Income Tax Leader at Armanino, joined Jennifer Kowal, Senior Managing Director and Senior Income Tax Strategist at IEQ Capital, to discuss the complexities of state tax residency. The conversation explored how residency is determined, how enforcement is changing, and key considerations for navigating this area within a broader wealth planning framework.

The Evolving State Tax Landscape

The discussion began with an overview of the current state tax environment, which the speakers noted is undergoing a gradual shift.

Rather than relying solely on rate changes, states appear to be expanding the ways in which high-income individuals may be taxed, including through surtaxes, capital gains taxes, and other mechanisms. This shift is occurring alongside fiscal pressures, with increased attention on high-income taxpayers, particularly those associated with significant liquidity events.

Within this context, residency may play an increasingly important role in determining whether a state can tax a taxpayer's full income base.

Residency Determination and Audit Considerations

A central theme throughout the discussion was that residency is evaluated through a facts-and-circumstances framework rather than a single rule.

While factors such as day counts, driver's licenses, and voter registration may be relevant, the speakers noted that these are rarely determinative on their own. Instead, outcomes often depend on whether the overall fact pattern presents a consistent picture of where an individual's life is centered.

The conversation also highlighted that residency audits may be more prevalent for ultra-high-net-worth individuals, particularly those with significant income or liquidity events. These audits may be document-intensive and span multiple years, with state authorities reviewing financial records, travel data, and other personal information to assess residency claims.

Post-Move Behavior and Ongoing Tax Exposure

Another key theme was the importance of behavior following a residency change.

The speakers noted that audits often occur several years after a return is filed and may involve review of multiple tax years. As a result, actions taken after a move may influence how earlier years are evaluated, reinforcing that residency planning is often a multi-year process.

In addition, changing residency may not eliminate all state tax exposure. States may continue to tax income sourced to their jurisdiction, including compensation, business income, and certain employer-based sourcing rules, particularly for individuals with ongoing ties to a prior state.

Structural Considerations and Documentation

The discussion also addressed several structural complexities, including dual-state residency claims, family dynamics, and the impact of multiple residences or deferred compensation structures. These factors may introduce additional variability in how residency is evaluated across jurisdictions.

Documentation was identified as a key component of supporting a residency position. States are increasingly reviewing detailed aspects of a taxpayer's personal and financial life, and contemporaneous records may help demonstrate consistency during an audit process.

Conclusion

The discussion provided a perspective on an increasingly complex state tax environment, where residency determinations are subject to greater scrutiny and enforcement.

As these dynamics continue to evolve, the conversation highlighted the importance of understanding how residency, income sourcing, and long-term consistency may influence outcomes within a broader wealth planning context.

The views and opinions expressed by Yoni Fix, Partner and State & Local Income Tax Leader at Armanino, during this fireside chat are his own and do not necessarily reflect the views, opinions, investment strategies, or recommendations of IEQ Capital, LLC ("IEQ Capital") or any of its affiliates, officers, directors, or employees. Mr. Fix's participation in this discussion should not be construed as an endorsement by IEQ Capital of Armanino.

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