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Individual tax strategies
Minnesota Supreme Court Decision Adds Wrinkle to Residency Rules
A recent Minnesota Supreme Court case and newly issued Minnesota Department of Revenue (MN-DOR) guidance may impact your residency planning.
Under Minnesota tax law, an individual could be a state resident in one of two ways: either they meet the domiciliary test (a series of 26 factors), or meet what is known as the 183-day rule. If you are found to be a resident, Minnesota will tax you on all of your income, no matter where it was earned.
In the Marks v. Commissioner of Revenue decision, the Minnesota Supreme Court addressed the interpretation and application of the 183-day rule. In general, the rule looks at the number of days you spend in Minnesota during which you maintain a place of abode (a residence with kitchen and bathroom).
The respondents in the case had spent 104 days in Minnesota while domiciled in the state of Florida. Later that same year, the couple moved back north and re-established Minnesota domicile. The taxpayers argued that the 183-day count should include only the days they spent in Minnesota while they were domiciled in Florida. But the Commissioner of the Minnesota Department of Revenue took the position that the 183-day count should include all days the taxpayers spent in Minnesota irrespective of their place of domicile.
The high court held in favor of the commissioner. Thus, this decision gives snowbirds and others considering second home purchases insight on how to pass the 183-day test to avoid any unintended consequences.
“What we learned from this case is that in a given year where you are domiciled in both Minnesota and in another state while maintaining an abode in Minnesota, where you spend your time will be added up by the state of Minnesota regardless of when you change your domicile during a calendar year,” says Nathan Thompson, a federal tax professional with CliftonLarsonAllen. “If you are planning to change domicile, be sure to factor this into your equation.”
In related news, the MN-DOR also released Revenue Notice 16-01, which relates to the domicile test. The term “domicile” means the bodily presence of an individual coupled with the intent to make such place one’s home. As previously mentioned, 26 factors are used to determine whether or not a taxpayer intends to establish a domicile outside Minnesota.
Revenue Notice 16-01 addresses two of those 26 factors: the physical location of the taxpayer’s accountant and attorney, and the location of bank accounts. The department of revenue states that the location of an accountant, attorney, or bank account does not, by itself, demonstrate the intent to retain domicile in Minnesota.
“Some taxpayers are dropping long-standing relationships with their attorney, accountant, or other advisors,” says Thompson. “This notice gives taxpayers a measure of confidence that having a professional advisor in Minnesota will not, by itself, result in a residency concern.”
The MN-DOR is trying to help taxpayers understand the new rules and has built a new residency web page to help. This page will help you find information about your residency status, the types of taxable income in Minnesota, and the state’s audit process. The state also published a residency report in 2015 that covers current residency laws, how other states handle them, and some of the common myths about residency.
How we can help
Understanding the Minnesota Supreme Court case is essential for structuring your residency planning, should you decide to move out of Minnesota. The Minnesota residency rules can be complicated, but our experience and knowledge can help you successfully plan your change of residency. If you have questions about residency and the recent court ruling, please reach out to our state and local tax team.