With the new limitation on deductions for state and local taxes, more NJ residents than ever are contemplating a move to lower-tax jurisdictions. The most popular destination is Florida, which besides its warmer climate, also has the benefit of being one of a handful of states without a state income tax.
If you’re contemplating the move, there are some important things to keep in mind in case you face a New Jersey residency audit. In New Jersey, residency depends on where you are domiciled and where you maintained a permanent home during the tax year.
To be a nonresident, New Jersey cannot be your domicile and you must spend less than 183 days here. You can also be considered a nonresident if NJ is not your domicile and you spent 183 days here, but you do not have a permanent home here.
What To Know About A New Jersey Residency Audit:
- What is domicile in the context of a residency audit?
- What is a permanent home in the context of a residency audit?
- What to expect in a residency audit
- Common mistakes taxpayers make
- Residency audit red flags
- New Jersey Residency Audit FAQs
What is domicile for NJ residency audit purposes?
Domicile is your true home. It’s the place you intend to return, despite an absence from the state. You can only have one domicile at a time, even if you have homes in multiple states. Here are some factors NJ looks at in determining domicile:
- Your intent,
- Where you register to vote,
- Your driver’s license,
- Your vehicle registration,
- Where you have family ties,
- If your federal tax return lists NJ as your homes address,
- Location of bank accounts,
- Where you claimed a Homestead Benefit,
- Where your children go to school,
- Whether you lease or sold your NJ property,
- Your business activities in NJ,
- Time spent in NJ,
- Where you keep items “near and dear to the heart”
- And almost anything else NJ can use to establish a domicile in the state.
If you turn out to be domiciled in NJ, all hope is not lost. If you meet all the following 3 conditions, you’ll still be considered a nonresident for tax purposes:
- You did not maintain a permanent home in New Jersey,
- You did maintain a permanent home outside New Jersey, and
- You did not spend more than 30 days in New Jersey.
Unless all 3 conditions apply, you are domiciled in NJ. Notice, two of the factors discuss having a “permanent home.”
What is a permanent home for NJ residency audit purposes?
A permanent home is a residence—basically any place a person can live—that you maintain permanently as your household. You don’t have to own it for it to be a permanent residence. In addition, it could be a residence your spouse owns or leases. Vacation homes are not permanent residences. If you get a temporary job in a state, the place you live is also not a permanent home (since the job is temporary).
Even if you are not domiciled in NJ, you can still be considered a full-year resident of the state. If you have a permanent home here, and spent more than 183 days in New Jersey, you are considered a full-year resident. NJ tax law calls this a “statutory resident.” If you’re considered a statutory resident, you will be taxed on all of your income even if it’s from sources out of state.
What can you expect in NJ residency audits?
Residency audits are some of the most thorough audits NJ conducts. They look at things like your cell phone records, bank statements, E-Z pass records, airline tickets, and the like. They will examine your bank statements to see where transactions occur.
Where Taxpayers go wrong
My advice to taxpayers considering a change in residency is always the same. First, don’t try to game the system – you will lose. If you really intend to move out of state, move out of state. If, however, you intend to “move out of state” (wink-wink) to avoid NJ taxes—don’t.
If your intent is really to move out of state, look at the factors for domicile and make sure all, or as many as possible, are your favor. If you will be keeping a second home in the state, make sure you keep a day count log – a log of days in and out of the state. Cell phone apps like TaxDay are incredibly helpful keeping track. Keep in mind that even if you are in New Jersey for part of the day, you are considered here for a full day. There are exceptions, but don’t count on them.
Taxpayers often come to me defiant when facing a residency audit. “Let them prove I’m a resident,” they’ll say. But that’s not how it works—the burden is on the taxpayer to show a change of domicile.
NJ Residency Audit Red Flags
There are some events that can increase your likelihood of a residency audit:
- Filing a nonresident return when you have a permanent home in the state,
- Not filing a return when there is some connection to the state, and
- Filing a nonresident return when you’ve file resident returns in years prior
You should be extra careful in your filings if any of the above scenarios apply.
New Jersey Residency Audit Faqs
Why Does New Jersey Perform Residency Audits?
Compared to other states, New Jersey has relatively high-income tax rates. With new limitations on deductions for state and local taxes, some residents of New Jersey have considered moving to a state with lower or no state income taxes. The state conducts residency audits to ensure that people who claim to have moved out of New Jersey really did — and are not just attempting to game the system and avoid paying taxes. The goal of residency audits is to ensure that people who live in New Jersey are paying their fair share of taxes.
Who Is Considered a New Jersey Resident for Tax Purposes?
For income taxes, New Jersey residency is based on factors such as where you are domiciled, how many days you spend in New Jersey, and whether you have a permanent home here. A person can only be domiciled in one state; their domicile is considered their true home.. If you are domiciled in New Jersey, you will generally be considered to be a resident of the state for tax purposes (with a few exceptions).
When Is a Home in New Jersey Considered Permanent for Residency Audits?
For purposes of New Jersey residency audits, a home is considered permanent if you maintain it permanently as your household. It does not matter if this home is owned or leased; it is a question of whether it is set up as a permanent household. For residency audits, beach or vacation houses are not considered permanent homes. This concept is important when it comes to determining residency, as a person with a permanent home in New Jersey may be required to pay taxes.
Consider Hiring a Tax Attorney
NJ residency audits are time-consuming, difficult, and exhausting. If you’re facing a residency audit, consider hiring a tax attorney to help with the process. Brad Paladini has a Master of Laws in taxation from the University of San Diego School of Law. Attorney Paladini worked for California’s largest and best tax controversy firms before starting his own practice. He has helped residents throughout New Jersey protect their assets and reduce tax liabilities. Attorney Paladini can communicate with the New Jersey Division of Taxation on your behalf to ensure the best possible outcome. Contact Paladini Law to schedule an initial consultation by calling (201) 381-4472 or filling out a contact form.