Leaving the Natural State: Navigating Arkansas’s Income Tax Residency Tests

Whether to Florida, Texas, Tennessee, or elsewhere, it’s a reality that Arkansans move out of the state for personal or professional reasons—or sometimes even tax planning purposes. But taxpayers who do so need to be careful to ensure that they successfully abandon their Arkansas domicile so that the state can no longer tax their worldwide income.

The Arkansas Department of Finance and Administration actively audits residency issues, and a steady stream of administrative hearing decisions is testimony to Arkansans and former Arkansans being surprised being surprised with continuing Arkansas tax obligations.

Arkansas has three tests for determining residency for income tax purposes, outlined under Individual Income Tax Regulation 2.26-51-102(9). The satisfaction of any of the three is sufficient to establish residency.

The first prong asks whether the person is domiciled in Arkansas. The regulation dictates that “[d]omicile is comprised of an act coupled with an intent” including “physical presence” coupled with the intent to regard “the place as a permanent home.” Thus, when a person places themselves physically within the State of Arkansas with the intent of making Arkansas the state in which they will live, domicile arises. That Arkansas domicile is not lost until a new domicile is established outside of the state. Moving out-of-state temporarily is insufficient.

The second prong of the test is a straightforward day count: “any person who maintains a permanent place of abode within Arkansas and spends in the aggregate more than six (6) months of the year within Arkansas” must file as an Arkansas resident. The regulation goes on to explain that “[a] temporary home or residence would not be considered a place of an abode, as there must be at least some degree of permanence.”

The third prong of the residency test really ties back to the first: it is basically a list of factors to consider in determining a taxpayer’s domicile. The factors for determining residency under the third prong are:

• Address used on federal income tax returns;
• Address used on telephone, utility, and commercial documents;
• Address used on voter registration;
• Address used on driver’s license, hunting, and fishing license;
• Address used on motor vehicle, boat, and trailer registration;
• Address used on real and personal property tax documents;
• Address used on county and other tax assessments;
• Address on governmental documents, such as military records. With respect to military records, the Leave and Earning Statement is a very important document;
• If the Taxpayer has a spouse, the spouse’s address on such things as driver’s license, voter registration, vehicle registration, etc. should be checked out;
• Employer and withholding information, nature of Taxpayer’s employment (traveling salesperson, etc.);
• Location of Taxpayer. How often and for how long is Taxpayer present at the locations at issue;
• Location of immediate family, such as spouse and children;
• Length of time in Arkansas of Taxpayer and immediate family;
• Community affiliations, such as club memberships, church, bank accounts, etc.;
• Absence of factors in other states.

In addition to these, note that if a taxpayer retains ownership of a house in Arkansas, DFA may check to see if the homestead credit is being claimed, which is essentially a claim that the home is a primary residence. Many taxpayers in such a situation inadvertently overlook that they should stop claiming the homestead credit.

Taxpayers who plan ahead can manage many of these factors to make a strong case for having abandoned their Arkansas domicile. Taxpayers who find themselves under a residency audit may consider seeking representation to make their best case that they really did leave the Natural State.