This is a follow-up to the article titled “Snowbirds Fly Free of Illinois Tax” that was published in the February 2013 edition of the ISBA Trusts & Estates Newsletter. For many long-time Illinois residents, living part of each year in Florida is an ideal lifestyle. These “snowbirds” typically flee the state during the winter months, trading in snow boots for sandals. But the snowbird lifestyle may offer something more than weather-related benefits. A nonresident does not pay Illinois income tax on income from a non-Illinois source. The question is, then, can Illinois snowbirds, while retaining their Illinois homes, become nonresidents for Illinois income tax purposes? The Illinois Appellate Court ruled that it is possible. The Illinois Department of Revenue (“Department”) has now said, “Not so fast.”
The Department is smarting from the snowbird taxpayer victory in Cain v. Hamer.1 In Cain, the taxpayers claimed Florida residency despite having been Illinois residents for many years and continuing to own a house in Illinois. The taxpayers spent about equal time in Florida and Illinois during the tax years in question. Nevertheless, the taxpayers prevailed in litigation over a $1.8 million Illinois income tax bill. We examined the Cain case in detail in a previous article, which was published in the Trusts & Estates Newsletter, Volume 59, No. 7, page 1 and the Agricultural Law Newsletter, Volume 22, No. 5, page 1.
Not surprisingly, the decision in Cain has prompted the Department to respond. Instead of appealing Cain to the Illinois Supreme Court, the Department has elected to change its regulations. The obvious purpose is to try to ensnare imprudent Illinois snowbirds.2
The Old Regulations – Presumption of Residence
The Department’s previous regulations provided that if an individual spends in the aggregate more than nine months of any taxable year in Illinois, the individual will be presumed to be an Illinois resident. The old regulations further provided a presumption of non-residence if an individual was absent from Illinois for one year or more. These old presumptions have now been washed away like a sand castle on the beach.
The Amended Regulations – Presumption of Residence
Under the amended regulations, effective April 19, 2013, snowbirds are now subject to two separate “rebuttable presumptions:”
1. An individual receiving an owner-occupied homestead exemption (see 35 ILCS 200/15-175) for Illinois property is presumed to be a resident of Illinois.
2. An individual who is an Illinois resident in one year is presumed to be a resident in the following year if (s)he is present in Illinois more days than (s)he is present in any other state.3
These presumptions are not conclusive and may be overcome by “clear and convincing evidence” to the contrary.
The first rebuttable presumption is an obvious attempt to trap the unwary snowbird who has been a resident of Illinois and retains an Illinois house. Illinois home owners regularly claim the owner-occupied exemption for real estate tax purposes. The exemption reduces assessed value by $6,000 or $7,000.4 Typically the exemption is claimed once and automatically renewed each year thereafter. The Department is trying to use this automatic qualification for the owner-occupied exemption as an admission that the Illinois resident is claiming the Illinois house as the taxpayer’s principal residence.
The second rebuttable presumption affects owners who spend less time in Illinois than in any other state in the first year of non-residency. In Cain during some of the years at issue, the taxpayers actually spent more days in the State of Illinois than in any other state, including Florida. Still, the taxpayers were found to be nonresidents of Illinois.
The amended regulations also provide that if either one of these two new rebuttable presumptions is applicable, the taxpayer must file an Illinois income tax return that contains full disclosure of all facts.5 The full disclosure would give the Department the information needed to easily issue a notice of deficiency against the snowbird taxpayer claiming nonresident status.
Further, the amended regulations expand the types of evidence that may be submitted to rebut the presumption of residence or non-residence. The new types of evidence are:
• the location of spouse and dependents,
• the permanency or temporary nature of work assignments in the state,
• the location of professional licenses, and
• the location of medical and other healthcare providers, accountants and attorneys.6
The amended regulations include one taxpayer-friendly concession: making financial contributions to an Illinois charity is not a factor in determining whether the donor is an Illinois resident.7 This “non-factor” is good news for taxpayers and for Illinois based not-for-profits, but it is in stark contrast to the other amendments that heavily favor the Department.
To avoid the snares contained in the regulations enacted in response to Cain:
1. Make sure your snowbird client does NOT claim the owner-occupied exemption (sometimes called the “homestead exemption”) on the client’s Illinois real estate tax bill. The exemption normally reduces assessed value by $6,000 or $7,000. The additional real estate tax cost is fairly insignificant. The taxpayer simply needs to go to the supervisor of assessments office in the county where the house is located to withdraw the owner-occupied exemption on his or her Illinois house.
2. Make sure that in the first year of non-residency your Illinois snowbird client does not spend more time in Illinois than any other state in which the client is present during the year. For example, if Florida is the new state of residency, the snowbird client needs to be able to document spending more time in Florida than the client spends in Illinois, regardless of whether the client spends time in places other than Illinois and Florida.
Through newly adopted “rebuttable presumptions,” the Department is more aggressively attempting to catch snowbirds who retain an Illinois house.
Thirteen Lessons to Follow
We now have 13 lessons for establishing nonresident status. Ten are from our previous article and three are new.
1. If the taxpayer works in Illinois or earns income from an Illinois source (such as real estate located in Illinois), that income is subject to Illinois income tax regardless of residency.8
2. If the taxpayer has only retirement income, Illinois exempts it by allowing a subtraction of retirement income in computing Illinois taxable income.9
3. An Illinois resident has the right to establish a domicile different from Illinois under the four part test:
a. physical abandonment of the first domicile;
b. an intent not to return to the first domicile;
c. physical presence in the new domicile; and
d. an intent to make that one’s domicile.
4. The taxpayer should pick a state like Florida, which has a statute authorizing the individual to designate it as the state of residency. The taxpayer should fully comply with the statute.
5. Individuals may have only one domicile, and domicile does not alternate between two states during a calendar year.
6. The taxpayer should maintain logs of physical presence during the year.
7. The issue of whether a taxpayer’s presence in Illinois is other than “temporary or transitory” is a fact and circumstances test, but the following do not make a person an Illinois resident:
a. being physically present in Illinois for a significant amount of time each year (more than five months but less than six months),
b. retaining ownership of an Illinois house,
c. being a member of social clubs in Illinois
8. The taxpayer should take all action in the new state of residence as if the taxpayer resided solely in that new state: register to vote, obtain all licenses there (driver’s, car, firearms, hunting, and any others), use the new mailing address, have newspaper subscriptions delivered, change telephone cell numbers, do banking, change registrations, buy a burial plot, obtain medical care, retain legal advisors, and contribute to political candidates of the new state.
9. Not filing an Illinois tax return results in an indefinite time for Illinois to assert a notice of deficiency.10 Consider having the client receive some Illinois source of income requiring the filing of an Illinois nonresident return so at least some statute of limitations is running. A taxpayer presumed to be an Illinois resident but claiming nonresident status is required to file a return complying with the regulation.11
10. If a dispute with the State of Illinois occurs, argue the taxpayer has closer contacts with the non-Illinois state and hope you draw the same appellate panel that decided Cain.
11. Be sure the taxpayer withdraws the owner-occupied homestead exemption for real estate taxes on the Illinois house.
12. For at least the first year of establishing non-residency, the taxpayer should be able to document more time is spent in the resident state than in Illinois.
13. Charitable gifts to Illinois based charities are a non-factor.
Following these lessons can avoid potential pitfalls. The snowbirds can then fly free of Illinois income tax - again. ■