Home is where the heart is. And the house, wife, kids, cars…

September 20th, 2012 by Joe Kristan

An executive got transferred from his employer’s Iowa office to Dakota Dunes, South Dakota.  His wife balked at the move, so he rented an apartment in South Dakota and came home on weekends.  Noting the difference between the income tax rates in South Dakota (0%) and Iowa (8.98%), he chose to file as a South Dakota resident.  But he did it wrong.  Ericka Eckley of the ISU Center of Agricultural Law and Taxation explains the rules:

Every Iowa resident must pay Iowa income taxes. A resident  for income tax purposes can be identified in two ways. The first is through the  establishment of a permanent home in the state, which involves spending about  half the year living in the state.  Alternatively, a domicile is another way to  prove residence. Domicile is established through the intention of the  individual to permanently or indefinitely reside in Iowa whenever absent from  the state.

An individual can only be domiciled in one place at a time  and once established, domicile is retained until the individual takes  affirmative steps to establish a domicile in another state. In Iowa, there is a  rebuttable presumption that the individual’s Iowa domicile has not changed if  an individual retains the rights of citizenship in Iowa.

A change in domicile can be established through proof of a  definite abandonment of the former domicile, actual removal of the individual’s  physical presence to the new domicile, or a bona fide intention to change and  remain in the new domicile indefinitely.

It may possible to have a domicile in a different state than your spouse — like former power couple Arnold Schwarzenegger and Maria Shriver.  But it isn’t easy, and you can’t take shortcuts if you try.  An Iowa appeals court yesterday said the taxpayer didn’t try hard enough.  For example:

  • He kept a joint Iowa bank account
  • He kept his Iowa drivers license
  • He registered to vote in Iowa
  • The family cars (five of them) were registered in Iowa.
  • His personal car had Iowa vanity plates.
  • He claimed a homestead property tax credit for his Iowa home; the credit application included the statement “I declare residency in Iowa for purposes of income taxation and no other application for homestead credit has been filed on other property.”

The court found factors like these, which indicate Iowa residency, outweighed those indicating South Dakota domicile, such as his South Dakota job, seeing a South Dakota doctor, and membership in a South Dakota  church (though not spending weekends in South Dakota probably weakened that argument).

That was a bad result for the taxpayer; the appeals court upheld the Iowa assessment of $290,472.19 in taxes, penalties and interest.

The Moral?  If you want to change your tax domicile from a high-tax state to a low-tax one, you need to mean it.  You need to burn your bridges and change as much of your life as possible to the new state.  And for heaven’s sake, don’t cheap out and claim an Iowa homestead exemption when you are filing tax returns saying you don’t live here.

Cite: Schmitz vs. Iowa Department of Revenue, Court of Appeals of Iowa No. 2-583. Additional coverage:  Dar Danielson,  Appeals Court says taxes are due as man lives in Iowa, not South Dakota (Radio Iowa).

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