While often used interchangeably, residency and domicile are distinct legal concepts with significant implications for state and local taxes. Your domicile represents your "true home" – the place you intend to return to even when you're away. You can only have one domicile at a time, and it is often considered your "home state" for tax purposes. Establishing a domicile involves both the factors used to determine residency and an additional layer of intent and permanence, which include:

• Where you spend most of your time and consider your main home.
• Where you are registered to vote and exercise your right to vote.
• Where your spouse, children, and significant personal possessions reside.
• Which state issued your driver's license, and where your vehicle is registered.
• Your affiliations with social, religious, or professional organizations in a specific location.
• Where you work and conduct business.
• Your “declared intent,” which refers to explicit statements or actions indicating your intention to make a particular place your permanent home. This could include legal documents such as wills or trusts, or statements made in official capacities.
• Your duration and permanence, which refers to the length of time you have lived in a place and the nature of your ties to the community.

By contrast, residency is a more flexible concept than domicile, as you can be a resident of multiple states simultaneously. Generally, states consider the following factors to determine residency:

• Physical presence, which refers to the amount of time you spend in a state. Many states have specific thresholds (e.g., 183 days) for establishing residency, but others take a more holistic approach by considering the overall quality and nature of connections rather than just time spent).
• Residential ties to the state, which involves actions and connections such as renting or owning a home, having a job, registering to vote, or obtaining a driver's license in the state.
• Your “intent to remain,” which is demonstrated through actions that show ties to the state, such as maintaining a home, having employment, or registering vehicles.
• Where you have bank accounts, investments, or business interests.

As you may have noticed, intent is a criterion both in terms of residency and domicile, which may be confusing at first glance, so it bears clarifying that when we talk about "intent" in the context of residency, it refers to a more immediate and practical intention. It's about your current actions and plans within a specific timeframe. For example, suppose you move to a new state for a job, but you intend to return to your home state eventually. In that case, your current actions and the length of your stay indicate an intent to remain in the new state for a significant period. This intent, combined with your physical presence, establishes residency. By way of contrast, the "intent" factor for domicile is a deeper, more permanent intention. It's about your true home, the place you consider your permanent residence, and where you ultimately intend to return, even if you temporarily live elsewhere. Furthermore, it's a more subjective and long-term concept that goes beyond your current actions and immediate plans. To better understand the difference, consider the following scenarios:

• Scenario 1: A student moves to a different state for college and rents an apartment there. They intend to stay in that state for the duration of their studies, which could be several years. This indicates an intent to remain and establishes residency in that state. However, their domicile might still be their home state where their parents live if they intend to return there after graduation.
• Scenario 2: A professional takes a temporary job assignment in another state for a year. They rent an apartment and obtain a driver's license in that state. This demonstrates an intent to remain for the duration of the assignment, establishing residency. However, if they maintain their primary home in their original state and plan to return after the assignment, their domicile remains unchanged.

As you can see, in both scenarios, there's an intent to remain in the new state, but the nature of that intent differs. For residency, it's a more immediate and practical intent related to current activities and plans. For domicile it's a deeper, more permanent intent pertaining to one's true home and long-term plans.

Now that we understand the differences between residency and domicile, let's explore how these concepts significantly impact your state and local tax obligations, particularly regarding income taxes.

How Income Taxes are Affected

The tax obligations for residents and non-residents differ substantially. Most states that impose income tax require residents to report and pay tax on their worldwide income. This includes all income sources: wages, investments, and business profits, regardless of where they're earned. In contrast, non-residents typically only pay tax on income sourced from within the state, including wages earned while working in the state, rental income from property located in the state, or profits from businesses operating within the state.

Your state of domicile generally claims the primary right to tax your worldwide income, which can lead to complex tax situations, especially when you're temporarily residing in another state. For example, if you're domiciled in State A but working temporarily in State B, State A may claim the right to tax all your income, while State B may tax the portion earned within its borders. This scenario potentially leads to double taxation, necessitating careful tax planning and tax credits for taxes paid to other states.

Part-year resident considerations can complicate matters even more, because when you move between states during a tax year, you'll likely need to file part-year resident returns in both states. This process requires determining the exact date your residency changed, allocating income and deductions between the states based on when they were earned or incurred, and understanding and applying each state's relevant laws regarding part-year residents.

Note that most states provide a credit for taxes paid to other states on the same income. However, the application of these credits can be complex, especially when dealing with states that have different tax rates or income calculations. Some states limit the credit to the amount of tax that would have been paid had the income been earned in the resident state, while others may offer a full credit.

How Estate, Gift, and Inheritance Taxes are Affected 

Estate, gift, and inheritance taxes are prime examples of how domicile can significantly impact your tax obligations. Currently, only 12 states and the District of Columbia impose estate taxes, with exemption thresholds ranging from $1 million to over $5 million. Your domicile at the time of death generally determines which state's estate tax laws apply, regardless of where your assets are located. For instance, if you're domiciled in Oregon but own property in Florida, your entire estate—including the Florida property—would be subject to Oregon's estate tax. 

Gift taxes, while less common at the state level, follow similar principles. Only Connecticut currently imposes a state-level gift tax, but your domicile can affect how gifts are treated for estate tax purposes in other states. 

Inheritance taxes, (which are levied on beneficiaries rather than the estate), are currently imposed by six states: Iowa (being phased out, and will be fully eliminated on January 1, 2025), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The decedent's domicile, not the beneficiary's residence, determines whether inheritance taxes apply. This means if you're domiciled in Pennsylvania and leave an inheritance to a California resident, Pennsylvania's inheritance tax rules would apply.

Exemptions, Credits, and Other Considerations

Understanding the various exemptions and credits available can significantly reduce your state tax burden, especially when dealing with multiple state tax obligations due to residency or domicile considerations. Many states offer credits for taxes paid to other states to prevent double taxation. These credits are particularly important for individuals who earn income in multiple states or those who change their domicile mid-year.

Domicile can also affect your eligibility for various state-specific tax exemptions and deductions. For example, many states offer homestead exemptions for property taxes, but these are typically only available for your primary residence in your state of domicile. Similarly, some states offer special income tax deductions or exemptions for residents that may not be available to non-residents or part-year residents.

It's also worth noting that some states have reciprocity agreements, particularly for income taxes. These agreements allow residents of one state to work in another without filing a non-resident return in the work state. For example, New Jersey and Pennsylvania have such an agreement, allowing residents of one state to work in the other without changing their tax home.

Finally, your state of domicile can significantly impact retirement income, as most states do not tax retirement income, and of the states that do, they offer various levels of exemptions or credits on other types of retirement income, such as pensions and retirement account withdrawals.