Clients and many taxpayers often wonder whether it might be beneficial in retirement or while still working to change their place of residency as a way to minimize their current and future state tax obligations, or as part of their long-term strategy to minimize estate taxes to a more tax-friendly state. While most states tax all or a portion of the income of their residents, certain states like Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax, and New Hampshire and Tennessee do not tax earned wages. These and other states may not have “state” estate and/or inheritance tax as well, making them very appealing for those looking to change their residency in the long-term.
Additionally, in light of the current pandemic, many employees now find themselves working from home, which may trigger these considerations and potentially complicate state tax filings, especially if you live in the high-income tax states of California, Connecticut, Massachusetts, New Jersey and New York, to name a few.
For those considering changing their residency as a way of managing their current or future tax burden and as it impacts their overall finances, we have outlined several important considerations for you to review before taking any immediate action:
For most people, determining your residency, or “domicile” is pretty straightforward—it’s the state in which you live. Technically, a domicile is a person’s fixed, permanent, and principal home that they reside in, intend to return to or remain in. However, for those who have multiple residences in multiple states, or who may be living somewhere else temporarily, determining domicile can be a bit more complicated. Most states consider a person to be a “statutory resident” if they spend more than 183 days (more than half of the year) in the state (although some states are not asserting the 183 day rule during the Pandemic) and maintain a “permanent place of abode” at that location. If your home is somewhere else, but you spend enough time in another state, you may be taxed as a “statutory resident”. So, for individuals with residences in multiple states, or for those who leave a state without severing residency ties, it is possible to be considered a resident, and therefore subject to income tax, in more than one state.
Change of Residency/Domicile
If you are considering changing your residency to a new state, it is your responsibility to clearly establish that your domicile has now changed, which is a “facts and circumstances” standard for most state taxing agencies. The key factors are 1) where is your home; 2) where is your primary place of business for what you do; 3) where do you spend the most time; 4) where are the things that matter most to you located (personal belonging, physician, country clubs, banking, church, etc.; 5) where are your family and friends located; and 6) where are the other key factors in your life located (license to drive, voter registration, homestead declaration, etc.).
As one can see, severing residency ties with a state and proving that you have now established your primary home (“domicile”) in a new state takes careful consideration and planning especially since many high-tax states, in particular, take the presumption that the appearance of a change in residency is solely to avoid state taxes and typically examine these changes in domiciles very closely to ascertain that the “facts and circumstances” surrounding the change of residency/domicile are true and accurate. Among other things, state tax examinations will closely examine credit card statements, telephone records, automobile registrations, voting registrations, toll records, bank account/branch records, personal logs and other travel records to determine where your true domicile is.
Additionally, if you have organized your estate plan, keeping it current and updating your Living Trust is a way to substantiate a change in residency. Estate planning is difficult enough but redoing an estate plan for a new state of residency is something only undertaken if one expects to be there permanently and can aid to support your claim of domicile in the new state. If you do not yet have an estate plan, we recommend you consider starting that process now in your new state.
While considering or changing your residency is perfectly fine to do, depending on your circumstances it may require careful consideration and planning to accomplish the desired results and avoid inadvertent consequences from a state tax examination.
If you are considering changing your residency or have questions about how your residency might impact your income and estate tax situation in the near or long-term, leave a comment below, or feel free to contact me directly. I’m happy to try to help!