Nevada Residency – Taking Advantage of Nevada’s Hospitable Income Tax Climate

Clearly one of the factors which motivates many individuals and businesses to relocate to Nevada is the hospitable income tax climate which prevails in the state. Nevada imposes no income tax whatsoever on individuals or on business entities.
The single most important prerequisite to enable a taxpayer to take advantage of Nevada’s "tax hospitality" is to domicile one's self in Nevada. In simple terms, this means the individual must make Nevada his principal place of residence--his primary home. Similarly, a corporation or other business entity must establish its "commercial domicile" in Nevada. Generally, this means establishing its principal office or place of business in Nevada--make Nevada the headquarters from which the business is managed and controlled.
Individuals who are "domiciled" in Nevada will generally escape state taxation of their income, except for income which arises from sources within another state. Two common situations in which income would be "sourced" to another state arise with regard to income from personal services performed by the individual in a "taxable" state, or income from property physically located in a "taxable" state--rental real estate located in the "taxable" state, for example.
Even in the case of taxpayers who are required to "source" one or more items of their income to a taxable state, circumstances may still allow for a significant reduction in their overall state tax burden. Let's take for example two taxpayers who moved from California to Nevada, with sources of income as depicted below.
Taxpayer A
Taxpayer B
Interest and dividends
$  390,000
$   500,000
Capital gain from sale of stock
$  500,000
Pension (rollover IRA) income, even if associatedwith California employment
$  100,000
$   150,000
Net rental income from California apartment building
$    10,000
$   250,000
California state income tax, as California residents
$    96,000
$  296,000
California state income tax, as Nevada residents
$      1,000
$    28,000
California state income tax saved as Nevada residents
$    95,000
$  268,000
 As California residents, ignoring deductions for sake of simplicity, taxpayers A and B could expect to pay $96,000 and $296,000 in California state income taxes. As Nevada domiciliaries, however, taxpayers A and B would only pay $1,000 and $28,000, respectively, paying tax only on the income from the California rental property. The move to Nevada enables the taxpayers to shelter from California taxation all their income from "intangibles", that is, interest, dividends and capital gains, and all of their pension (rollover IRA) income. A significant savings of $95,000 and $268,000, respectively!
Other taxpayers, including corporations, may also enjoy similar tax advantages. A corporation organized and domiciled in Nevada could significantly reduce its state tax burden. California and other taxable states generally tax business income of corporations based on the corporation's level of activity within and without a state, as determined through apportionment. Therefore, shifting at least part of the corporation's business activities to Nevada will generally result in a reduction of state tax. In addition, being organized and domiciled in Nevada will eliminate state taxation of the corporation's non-business income.
Trusts with Nevada fiduciaries can also gain a significant tax advantage. While income which is sourced to California and income distributed to California beneficiaries will continue to be state taxable, income distributed to non-California beneficiaries or income retained and taxable in the trust will escape California taxation. Alternatively, a trust with a California fiduciary would have to pay California tax on income retained in the trust, even if all beneficiaries were California non-residents.
For individuals, in addition to the obvious need to acquire a Nevada home, it is important in establishing Nevada residency that taxpayers take additional steps to clearly establish all (or, as many as feasible) business and personal connections in Nevada, and sever former connections with a taxable state from which they have moved.
The following factors will be considered by the state taxing authorities in their determination of whether a change in residence has occurred:
  • Physical presence in the state
  • Sources of income from within the state
  • Where you register to vote
  • Where you own a house
  • In which state is the homeowner's exemption claimed
  • Where your driver's license is issued
  • Where your closest business contacts are, including attorneys, accountants, banks, stock brokers, etc.
  • Where your closest social contacts are, including clubs
  • Where your vehicles are registered
  • Where your children attend school, and whether you paid resident or non-resident tuition
  • Which state has jurisdiction in the administration of your wills and trusts
  • Where you obtained a homestead exemption
  • Where you maintain a safety deposit box
  • Where you filed an affidavit of domicile
  • Where you own a cemetery plot
While no factor by itself can positively determine residency, registering to vote or claiming the homeowners exemption in California have been found to make the taxpayer a California resident, regardless of the other factors. There may be other factors to be considered in determining residency. Please contact us or your tax advisor concerning the implications to your particular situation.