Reaping Financial Benefits of Residency in Low-Tax States is More Difficult than it Appears by Michael Hirsch, JD, LLM
Posted on February 25, 2019 by Michael Hirsch,
The Tax Cuts and Jobs Act and the new $10,000 cap on the deduction for state and local taxes (SALT) have caused many wealthy families in high-tax states to consider moving to more tax-friendly jurisdictions, such as Florida, where they can avoid the imposition of a state-level personal income tax. However, the rules for establishing tax residency in a new state are complex and rife with many challenges that families must prepare to address in advance of an actual move.
Before uprooting a family and business operations in search of tax savings, taxpayers must understand how their current state of residence determines “domicile” for personal income tax purposes. It is not enough for an individual to have a home or residence in a particular state. In fact, even when taxpayers have multiple homes throughout the world, federal and state governments will recognize only one domicile, or permanent place of residency. Once an individual establishes domicile, that location continues to be his or her tax home until he or she meets several tests for obtaining permanent domicile in a new state and has no intention of returning to the original location in the future.
How states determine domicile depends on a variety of factors, including the number of days a taxpayer spends in the state, where they keep their favorite personal belonging, where their children go to school and their level of involvement and ties to the local community. For example, taxpayers who spend more than 183-days of the year in New York, Connecticut, California or another high tax-state cannot claim domicile in Florida regardless of whether or not they have a home or drivers’ license in the Sunshine State.
Following is a checklist of some of the steps that taxpayers seeking domicile in Florida should take for income tax purposes:
- Establish a permanent Florida address;
- Obtain a Florida driver’s license (for you and your family members) and transfer vehicle registration and insurance to Florida;
- Register to vote in Florida with the applicable County Supervisor of Elections;
- Tie health insurance to your Florida address and secure relationships and visits with local doctors, dentists, etc.;
- Ensure Florida address is included on all estate planning documents, including wills, trusts and powers of attorney;
- Transfer bank accounts, securities, brokerage accounts and similar investments to institutions located in Florida;
- If applicable, move valuables from an out-of-state safety deposit box to one located within Florida and in close proximity to your permanent Florida address;
- Move cherished family possessions, heirlooms and collectibles to the Florida residence you are claiming as your permanent home;
- Change your mailing address for all magazines, catalogs, credit cards, etc. to Florida home;
- Become a member of a Florida-based gym, country club, business association, charity, church or synagogue, etc., and let the organizations you belong to in your previous home state know of your change of address to Florida;
- Maintain a record of your physical presence in Florida, such as a journal or calendar;
- File a Declaration of Domicile with the county in Florida where you are establishing a permanent home.
While there is nothing stopping individuals from moving across state lines for tax reasons, it is critical that they maintain meticulous records, cross every “t” and dot every “i” to prove to state taxing authorities that they are committing to a permanent relocation that could result in significant lifestyle changes.
The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.
About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at firstname.lastname@example.org.