Q: It seems to be becoming more common for affluent Minnesota retirees to live in another state for six months and a day to avoid paying Minnesota state income tax on their pensions and investments. How is this tracked for compliance?
A: “It’s a good question,” said Ryan Brown, a spokesman for the Minnesota Department of Revenue. “The 183 day (6 month) rule does apply when it comes to residency.”
The 183-day rule most directly applies to determining who is unquestionably obligated to file a state income tax return. The rule is one of two parts of a residency test under state tax law. If someone spends 183 days in Minnesota — and being in the state for part of a day counts toward the total — they’ve triggered Part 1 of the test. And if they have a place to live in Minnesota, they’ve triggered Part 2.
The second part of that two-step determination of residency is defined like this on the Revenue Department website: “You or your spouse rent, own, maintain, or occupy an abode. An abode is a residence in Minnesota suitable for year-round use and equipped with its own cooking and bathing facilities.”
So if you meet the two-part test, you must pay state income taxes.
Logic might suggest, then, that if someone fails either part of the two-part Minnesota residency test, they’re not a Minnesota resident and aren’t required to file a state income tax return. But this is tax law, and it’s not — surprise, surprise — as simple as that.
It’s sort of like what Ask Us Guy learned many years about logical fallacies from Larry the Cucumber and Bob the Tomato while watching “Veggie Tales.” Larry the Cucumber noted that “The lady at the zoo said it — and who am I to tell her that’s she’s wrong? — ‘If there’s a tail, it’s a monkey. No tail, ape.’”
Which led Larry to wrongly conclude that a camera or a salad or a pillow, which don’t have tails, were therefore apes. And Bob the Tomato could not dissuade Larry of the belief that kites and comets, since they possess tails, are actually monkeys.
People with a home in Minnesota could find themselves on the losing end of an audit if they start thinking like Larry the Cucumber and assume that failing the Minnesota residency test by living 51% of the year down South means that they are not a Minnesota resident. More than a single characteristic goes into establishing whether a creature is a monkey, an ape or a Minnesotan.
“When determining residency we look at several domicile factors,” Brown said, pointing Ask Us Guy to another part of the Revenue website. “We consider a variety of factors and no single factor will determine their domicile.”
A person can spend 100% of the year living outside of Minnesota’s borders and still be a Minnesotan under tax law “if you move out of Minnesota, but do not intend to permanently remain in another state or country,” according to the website.
The “variety of factors” mentioned by Brown is a long list, and “physical presence — where you spend the majority of your time” is at the top. But other factors can offset that, including where you keep most of your stuff, where your spouse and kids live, where you’re a member of a club or an organization or a church, and where you or family members attend school and whether in-state tuition was charged.
The list of tests applied by the Department of Revenue in determining whether you need to pay Minnesota income taxes goes on and on.
Where do you have a job or a union membership or a professional license? Where do you own real estate? Where do you have business relationships? What’s the value of your home in Minnesota versus the value of your residence in another state? What’s the address on your driver’s license? Where are you registered to vote? Are you paying the non-resident fee for your Minnesota fishing or hunting license? What do you tell your insurance company when asked where you live?
All of those things and more could come into play if you’re audited. And the Revenue Department is not talking when it comes to what can trigger an audit.
“The selection criteria we use to determine audits — any audit, not just residency audits — is nonpublic information,” Brown said.
Bottom line: Burrowing more than half the year outside of Minnesota doesn’t automatically mean you’re no longer a Gopher. (Also, a gopher is not a monkey just because it has a tail.)
One last thing, although it probably won’t be of a lot of use to the conclave of onetime Minnesotans congregating in Naples, Florida, during the cold half of the year.
The whole state residency thing doesn’t matter for Minnesota tax purposes if your gross income is less than $12,400 because people below that threshold don’t have to file a return anyway.
Contact Ask Us at The Free Press, 418 S. Second St., Mankato, MN 56001. Call Mark Fischenich at 344-6321 or email your question to email@example.com; put Ask Us in the subject line.