Originally published on Forbes.com.
Move to Florida before you shove off on your foreign adventures is probably the moral of a recent decision of the Georgia Tax Tribunal – 2014-16, December 10, 2014, The taxpayers involved are referred to as Petitioner F-1 and F-2. So I will call them Frank and Fanny. Their identities are sealed due to Frank’s position as a US attache. Given the amount of detail in the case, I suspect even my meager investigative skills could uncover their identities, but there is really no point in that. Georgia Department of Revenue wants them to pay Georgia income tax on their US Government salaries for 2011. Frank and Fanny left Georgia in 2010, having lived there with their children since 2006. They have not decided where they will go once Frank’s tour as an attache ends.
The Basics
Frank and Fanny probably would have sold their Georgia home when they shoved off for the UK, but the tough real estate market discouraged that. That meant they had to rent the home out requiring them to file a Georgia non-resident return. The domicile issue would have been there regardless, but the return makes it a lot easier for Georgia to pick it up. They had Georgia drivers licences and voted in the 2012 presidential election, although no state elections. Their ballots in the Presidential election had a box checked indicating that they were US citizens living abroad, whose return was uncertain.
The drivers license and voting can weight very heavily in a typical domicile case, but not for someone who is living abroad. Expatriates are still United States citizens, but drivers licenses and voter registration are tied to states. A while ago I wrote about the convoluted case of someone I called Lois Lane. She lived in Japan, but kept her Rhode Island drivers license and voter registration. Rhode Island was OK with that, but when she went to New York to study, intending to return to Japan, Rhode Island tried to tax her.
The Stickiness Of Domicile
What Frank and Fanny ran afoul of is what I call the “stickiness of domicile”. Of course they might call it the “ickiness of domicile”. The principles, which are what they are even though they don’t reflect the reality of some mobile lifestyles, are that everybody has a domicile and that once domicile is established it does not change until it is abandoned and a new domicile is established.
Frank and Fanny live in housing provided by the State Department to US Embassy employees in London. Their children attend the American School in London, presumably to assure them the opportunity to enter into debt bondage by attending an American college. The rub is that they live in the UK under diplomatic residence permits, which expire 90 days after their jobs end. The court made much of the fact that they don’t pay UK income taxes. Regardless, even though it appears that they plan to have lived in the UK longer than they lived in Georgia, they have not established UK domicile, since they are not set up to live in the UK indefinitely. That means that they continue to have Georgia domicile even if they have no intent to return to Georgia.
If Frank and Fanny were working for a Big Four accounting firm on a long foreign assignment, the sticky Georgia domicile might not be such a hardship, since most, if not all, of their work income would be covered by the foreign earned income exclusion. The foreign earned income exclusion does not apply to federal government employees, so it does not help these taxpayers. The court expressed a bit of sympathy, which it then backpedaled on:
The result in this case, although arguably harsh should not come as a surprise. It is widely recognized in the diplomatic community that a diplomat must continue to pay income taxes to that person’s state of legal residence.
It then refers to the American Foreign Service Association’s Guidance on Legal Issues of Residence and Domicile which includes the statement
Moreover, because everyone must have a domicile, you do not lose the one that you were born with or acquired later unless you acquire a new one. It is usually not enough just to say that you are giving up your domicile in a particular state. You must show that you have given it up by moving to another state and simultaneously showing that you intend to make that state your permanent home. Your intention is thus an important element—but not the only element—of determining your domicile.
Sylvia Dion Weighs In
This case was interesting enough to reach out to my brain trust. I did not give much notice, but I was pleased that SALT (state and local tax) expert Sylvia Dion got back to me. Her response is consistent with Reilly’s First Law of Tax Planning – It is what it is. Deal with it.
In my role as State & Local Tax (SALT) consultant, I’m generally in the ‘pro-taxpayer’ camp in particular in situations where a state taxing agency, e.g., Department of Revenue, Division of Taxation, etc., has overstepped its constitutional boundaries, taken an overly aggressive position in interpreting the state’s statute or contradicted their own former interpretation in order to achieve the result they desire. And while I’d love to find grounds on which to side with the petitioners, in this situation I do think the Georgia Tax Tribunal was correct to side with the Georgia Commissioner of Revenue. The nature of the petitioners assignment with the U.S. Embassy in London was clearly intended to be temporary (for a 2 to 5 year period) – thus, the petitioners did not relocate to London with the intent of establishing permanent residency in London.
Sylvia had found herself in a similar boat at one point.
Perhaps I’m a little less than sympathetic to the petitioners as in 2001 my husband and I found ourselves in the similar circumstances when my husband’s Massachusetts based employer was acquired by a French corporation and my husband soon after was employed by the new French parent corporation. We relocated to France for a 3 year assignment also under temporary work Visas, and like the petitioners, leased our home in Massachusetts while we resided abroad. We continued to file as full-year Massachusetts residents for the years we resided in France.
Probably Easier Said Than Done
My covivant and I have been thinking about buying one of those mobile condos and taking to the open road and running up the electric bills of friends and relatives whose driveways we will park in. Sadly RVania has not yet applied for statehood, so our domicile would be wherever we pushed off from. I’m putting it on the record here and now, that before we take to the roads we will go to the place we love most – Florida and it is to Florida we will return. Well at least we will have come to love Florida the most by the time we push off. I’ve already read A Land Remembered, which is a good start.
With kids in school and a house that would not move, establishing Florida domicile before their foreign sojourn might have been too much for Frank and Fanny. CV and I will have a lot more flexibility.
If it is doable, setting up in one of the tax free states and having it be plausible that you will return there is probably the best strategy for someone going abroad or roaming. In addition to Florida, there are Alaska, Texas, Wyoming, South Dakota, Nevada, and Washington (the state). You will also see Tennessee and New Hampshire on lists like this one, but they tax interest and dividends. Alaska actually pays you to be a resident, so you will find that their cases are about not counting people as bona-fide residents. There are also issues like college tuition and even health care to consider. Items like that are among the reasons for Reilly’s Second Law of Tax Planning- Sometimes it’s better to just pay the taxes.