By Brad A. Galbraith, Board Certified Wills Trusts and Estates Attorney
Cold weather, ever-increasing state and local income, and property taxes, and new limitations on state and local income tax deductions are driving more Northerners to Collier County. We all have these people as our clients and we often address their questions about Florida Domicile. But do you know that your clients’ charitable contributions may be an important factor in their success or failure if their change of domicile is challenged in an audit?
Most states have what I like to refer to as a “bright line test” for determining domicile. While every state is different, in the majority of these states a person is deemed a statutory resident of the state if they spend a certain number of days in the state (e.g. 183 days) in a given year. Passing the bright line test is not the end of the story. The second prong of most states’ domicile tests is subjective – they ask “where does the person truly intend to make their permanent home?” That’s where charitable contributions can become important.
Consider your client from Minnesota. He is a lifelong supporter of the Mayo Clinic Foundation and continuing that support is an important objective for him. In an audit, can Minnesota use the fact that he continues to support the Mayo Clinic on an annual basis through charitable contributions to argue that his Minnesota residence is his true home and that claiming Florida domicile is just a tax play?
Actually, in his case, the answer is no. Thirteen states, including Minnesota, explicitly exclude the location of supported charities in determining where a taxpayer is domiciled. The following list shows those states that prohibit their department of revenue from considering the location of supported charities as a domicile indicator:
California – Regulation (18 CCR Sec 17014(d))
Connecticut – Regulation (12-701(a)(1)-1(d)(8))
Illinois – Regulation (86/1/100.3020(g)(2))
Kansas – Regulation (92-12-4a(b)(8))
Maine –Revenue Service Official Publication (“Determining Residency Status” dated April 2017)
Massachusetts –Department of Revenue Technical Information Release (TIR) 90-5 dated 5/11/90
Minnesota – Regulation (8001.0300/Subpart 3)
New Jersey – Statute (54A:1-2.1)
New York – Statute (Tax/Article 22, Section 605(c))
Ohio – Regulation (5703-7-16(A)(8))
Rhode Island – Statute (44-30-5(a)(1))
Vermont – Regulation (1.5811(11)(A)(i) Section 3)
Wisconsin – Statute (71.02(2)(a))
Interestingly, Virginia takes the opposite approach by explicitly stating that the location of charitable contributions can be considered in determining where a taxpayer is domiciled (23 VAC 10-110-30(B)).
What about the remaining states? The following thirty-six states do not explicitly include nor exclude consideration of the location of supported charities in determining where a taxpayer is domiciled:
Alabama Idaho Montana Pennsylvania
Alaska Indiana Nebraska South Carolina
Arizona Iowa Nevada South Dakota
Arkansas Kentucky New Hampshire Tennessee
Colorado Louisiana New Mexico Texas
Delaware Maryland North Carolina Utah
Florida Michigan North Dakota Washington
Georgia Mississippi Oklahoma West Virginia
Hawaii Missouri Oregon Wyoming
It is unclear whether a client from one of the above states will face a domicile challenge based upon their charitable giving so the conservative course of action is to recommend that they stop giving to the northern charity. To most of my clients, that advice is impractical and unacceptable.
So, what is the solution? Why not recommend creating a donor advised fund at the Community Foundation of Collier County? The client’s charitable contribution will be to a Florida-based charity and yet the donor can direct distributions from the fund to their favorite charities – whether they are located in Collier County or in a northern state. This is a complicated issue – with a simple solution.