Tax Notes

It is not unusual for people to relocate from Illinois to states with warmer climates and lower income taxes, such as Florida, Tennessee, Texas, and others. In connection with their move, they may buy or lease a home, apply for a new driver’s license, register to vote, and possibly even file some form of declaration of residency with their new home state. For many people this is sufficient evidence of their move from Illinois for state income tax purposes. However, for high-networth individuals, more is often required to prove a change of residency.

Auteurs: David P. Dorner

Over the last 15 years, the Illinois Department of Revenue has regularly audited high-net-worth individuals who claim to have shifted their residence from Illinois to a low- or no-personal-income-tax state. The DOR often focuses its audit efforts on individuals who accumulated significant wealth while living in Illinois and then shifted their residence to a low-tax state, or individuals who had a significant income recognition event (for example, the sale of a business) shortly after shifting their residence from Illinois. While it is perfectly acceptable to change one’s domicile for the primary purpose of tax planning, taxpayers must be careful to comply with the requirements for establishing domicile in another state. Such a change should be documented with admissible books and records.

Often, a former Illinois resident will maintain significant ties with Illinois, through the ownership of a former family home, an interest in an Illinois business, or through other investments connected with the state. They may also retain membership in Illinois country clubs and other Illinois-based civic, social, and religious organizations. It is also common for one spouse to move to another state while the other spouse remains a resident of Illinois to be closer to a parent, children, grandchildren, or friends. In these circumstances, the former Illinois resident may still make visits to the state on a frequent basis. Accordingly, while a high-net-worth individual may intend to terminate his or her Illinois residency, their unique circumstances, including the ownership of multiple homes and engaging in frequent travel, could lead the DOR, and possibly a court, to reach a different conclusion.

This article was originally published by Tax Analysts. To read the full article, download the PDF below.