Over the years many of Birchwood’s clients have explored switching up their primary residence to states with warmer weather and lower state income taxes. Florida is one of the most popular destinations that meet that criteria, but living in Florida for more than half the year is not the only hurdle to avoid paying income taxes in Minnesota.
Natalie Roberts, of Flagship Law, one of Birchwood’s estate planning attorney resource partners, has written an article about the many checklist items that need to be addressed when living in Florida in order to not have to file an income tax return in Minnesota. Natalie is licensed to practice in both Florida and Minnesota.
The State of Minnesota imposes both income taxes and death taxes. This blog, Part 1, will briefly examine the issue of residency for purposes of Minnesota’s state-level income tax. Part 2, available on my blog, will look at state-level estate taxes (also known as “death taxes”) imposed on the taxable estate of a decedent.
Most people believe that if they live in Florida for more than half the year (6 months and 1 day), they will no longer have to pay income tax in Minnesota. Unfortunately, it is not that simple. Whether an individual is subject to income tax in Minnesota is tied to the taxpayer’s residency.
Residency refers to the location of your permanent residence. Minnesota has three categories of residency:
- Part-time residents
A personal income tax is imposed on the entire net income of residents of the state. Nonresidents may still be subject to tax; they are subject to tax on the portion of their income that is derived from Minnesota sources, meaning income being generated by property or activities located in Minnesota. This includes business income and rental income, even if that income is received by the person while he or she is living outside the state. Part-year residents are subject to tax on their entire net income while a resident and the portion of income derived from Minnesota sources while a non-resident.
So how are each of these categories determined? Let’s look first at whether you are a resident.
Minnesota considers full-year residency under two tests:
- The Domicile Test
- The 183-day Rule
The Minnesota Department of Revenue considers both words and actions in determining residency, with actions carrying more weight than words. The Department of Revenue only has to determine you meet one of the two tests, not both.
MN Residency Test 1: The Domicile Test (also known as the intent-based test) in Minnesota
In Minnesota, a domiciliary (a person who is “domiciled” in Minnesota) is taxable for purposes of income tax. Domicile requires both:
- Physical presence, and
Physical presence is satisfied when a person maintains a permanent residence in the state. Intent is satisfied when the person intends to make that residence their permanent home for a fixed or indeterminate period of time. In order to change your domicile, you must be able to demonstrate intent to make the other location your permanent home. Minnesota utilizes a non-exclusive list of twenty-six factors to determine whether an individual is domiciled in the state.
No single factor determines domicile. The factors cover a range of elements: the locations of your spouse, children, and other relationships; keepsakes; memberships in organizations; place of worship; and much more (covered below).
Attorneys also recommend changing your phone number to the new local area code (including your mobile phone), changing your doctor, dentist, veterinarian, hairdresser, tailor, and so forth. The burden of proof is on you to prove you intended to, and did, change your domicile to a location outside of Minnesota.
In Larson v. Minn. Comr. of Rev., No. A12-0378 (Minn. Jan. 9, 2013), a taxpayer failed to change his domicile from Minnesota to Nevada despite purchasing and maintaining a home in Nevada, establishing a Nevada home office, registering to vote in Nevada, and obtaining a Nevada driver’s license … because other acts and circumstances of the taxpayer’s life demonstrated a continued presence in Minnesota.
If you leave Minnesota, but you plan to return to live in Minnesota, you are deemed to be a Minnesota full-year resident.
MN Residency Test 2: The 183-day Rule in Minnesota (also known as the statutory residency or physical presence test)
Even if you have a permanent residency in another state, you nevertheless are considered a Minnesota resident for income tax purposes if you meet both of these conditions:
- You spend at least 183 days in Minnesota during the year (and any part of a day counts as a full day!); AND
- You or your spouse rents, owns, maintains, or occupies a residence in Minnesota suitable for year-round use and equipped with its own cooking and bathing facilities (an abode).
If you meet both of these tests, you are considered a full-year resident of Minnesota for purposes of income tax. Note that your intent is irrelevant under the 183-day Rule.
One example of an exception: If you spend at least 183 days in Minnesota during the taxable year but only spend the warm months in Minnesota in a cabin that lacks heat, electricity, or indoor plumbing, you are a part-year resident and you are subject to tax on your entire net income for the period while you are in Minnesota, as well as the portion of income derived from Minnesota sources while you are a non-resident.
Even if you don’t visit that cabin at all or even if you don’t own that cabin, but you maintain that cabin, you are deemed to be a part-year resident. You are also taxable on the income for the period you maintained the abode. You can see there are traps for the unwary here.
You are also a part-year resident if you moved out of Minnesota to another location during the taxable year in question or if you moved into Minnesota during the taxable year with the intention of remaining.
It is up to you to maintain record evidence that you were not in Minnesota for longer than 182 days, and any part of any day counts. (Changing planes in a Minnesota airport does not count.)
Adequate records are any contemporaneously kept records that establish an individual’s physical presence on relevant dates; including calendars, diaries, canceled checks, credit card receipts, and airline tickets.
If you do not satisfy both the requirements of the 183-day Rule, and you are a resident of a state other than Minnesota, you are a nonresident.
So how do you escape the long arm of the Minnesota Department of Revenue? If you are planning to move out of Minnesota to another state, Estate Attorneys like Flagship Law can help you change your domicile and residence effectively and legally.
*Special residency rules apply to foreign nationals, active-duty military, and students.
26 Domicile Considerations according to Minnesota Law
The following is from the Minnesota Administrative Rules:
Considerations. The following items listed will be considered in determining whether or not a person is domiciled in Minnesota:
- Location of domicile for prior years;
- Where the person votes or is registered to vote, but casting an illegal vote does not establish domicile for income tax purposes;
- Status as a student;
- Classification of employment as temporary or permanent;
- Location of employment;
- Location of newly acquired living quarters whether owned or rented;
- Present status of the former living quarters, i.e., whether it was sold, offered for sale, rented, or available for rent to another;
- Whether homestead status has been requested and/or obtained for property tax purposes on newly purchased living quarters and whether the homestead status of the former living quarters has not been renewed;
- Ownership of other real property;
- Jurisdiction in which a valid driver's license was issued;
- Jurisdiction from which any professional licenses were issued;
- Location of the person's union membership;
- Jurisdiction from which any motor vehicle license was issued and the actual physical location of the vehicles;
- Whether resident or nonresident fishing or hunting licenses purchased;
- Whether an income tax return has been filed as a resident or nonresident;
- Whether the person has fulfilled the tax obligations required of a resident;
- Location of any bank accounts, especially the location of the most active checking account;
- Location of other transactions with financial institutions;
- Location of the place of worship at which the person is a member;
- Location of business relationships and the place where business is transacted;
- Location of social, fraternal, or athletic organizations or clubs or in a lodge or country club, in which the person is a member;
- Address where mail is received;
- Percentage of time (not counting hours of employment) that the person is physically present in Minnesota and the percentage of time (not counting hours of employment) that the person is physically present in each jurisdiction other than Minnesota;
- Location of jurisdiction from which unemployment compensation benefits are received;
- Location of schools at which the person or the person's spouse or children attend, and whether resident or nonresident tuition was charged; and
- Statements made to an insurance company, concerning the person's residence, and on which the insurance is based.
Any one of the items listed above will not, by itself, determine domicile.
Charitable contributions made by a person will not be considered in determining whether that person is domiciled in Minnesota.
For more information visit: https://www.revisor.mn.gov/rules/8001.0300/#rule.8001.0300.3