Changing State Residency: Tax and Other Considerations
- State income and death taxes are imposed based on residency and/or domicile, and the two are not always the same. Moving to another state requires meticulous attention to changing both residency and domicile and the details, documentation and intent required to do so.
- A choice of domicile may be tax-motivated, but personal concerns, comfort and family matters may take practical precedence.
- Maintaining a primary residence in one state and a second home in another necessitates careful documented adherence to the requirement of daily presence in the primary residence state. In most states, a person can only have one domicile, and it is paramount you have a “closer connection” to your home and your intent be always to return to your home state after a period of absence.
Reasons for moving
According to the National Association of Realtors®, during the height of the COVID-19 pandemic from March to October 2020, 34 states experienced net migration gains, meaning these states had more people moving into the state than moving out.1 There are many reasons people choose to move from one state to another. Maybe they’re downsizing from a large home, moving to be closer to family, pursuing new business or job opportunities or looking to minimize estate, property and other taxes, among others. Or perhaps the housing market in another state is enticing for retirees, the cost of living is lower and healthcare costs are a consideration. Maybe you’re looking for a more active lifestyle or more cultural attractions. Or maybe the weather is a draw. For example, Florida is a popular destination when moving for climate and tax considerations because it is one of five states that does not impose income or estate tax.
One of the main reasons for moving to another state is tax considerations. Forty-three states may impose income taxes anywhere from 1.4-9.0%, and even higher for incomes over $1 million. County and local income and property taxes can also vary widely. Also, some states tax income from individual retirement accounts and pensions. These considerations impact the actual tax you pay at various life stages.
Several states have no state estate or inheritance tax. Even if your assets are below the federal estate tax threshold, death taxes in some states can be significant. Also, some states may not have an inheritance tax on property passing to a spouse, but they do have one if property is passing to descendants, siblings or other beneficiaries.
Some states, particularly in the Northeast and Mid-Atlantic, have very high local property and school taxes. Florida, Texas and a handful of other states have homestead exemptions that eliminate or lower property taxes on most home types, including single family homes and condominiums. The homestead exemption can also provide protection from creditors.
If you change your residency and domicile, it is a good idea to review your estate planning documents, financial and health care power of attorney. Rules vary widely across states regarding how documents should be signed, notarized and witnessed. There may also be applicable statutes regarding who can serve as your executor, personal representative or power of attorney.
For example, Florida has less generous laws than most other states related to who can serve as a personal representative, also known as an executor, of your estate. Generally, only Florida residents, persons related by blood, marriage or adoption and Florida corporate fiduciaries may serve without bond. For this reason, if you move to Florida you should have a Florida attorney review your will and be certain the persons you name as your fiduciaries can serve without any additional burden. Similarly, some states may not honor a health care proxy or power of attorney executed under the laws of your former state.
It is important to remember that your domicile is the place to which you always intend to return; it is your home. A residence may be somewhere you live only temporarily, but if it is more than 183 days of the year, the state may deem you a tax resident even though you did not intend to change your domicile. You need to thoroughly understand the rules of both states, the one you are coming from and the one you are going to. As states like New York, California and New Jersey have litigated the domicile of an ever greater number of persons trying to leave these high tax states, they will look at many factors, including where your extended family resides, how often you visit, where you keep your art collection, where your primary doctor resides, where your beloved pets reside, where your charities are located and so on. One recent California court decision found that a couple had not moved their domicile from California to Nevada, largely because their new residence was rented; it was not a permanent residence because it had not been purchased.2 In almost all other respects, the California couple had followed all best practices recommended for changing domicile. You must basically shift the center of your universe to a new state if you are going to successfully change your domicile.
Steps to establish domicile
If you have decided to move to another state, following are actions you should take in your new home state:
- If available, file a declaration of domicile in the Office of the Clerk of the Circuit Court in the county in which you reside.
- Declare you are a legal resident of your new state in your will, codicil or trust. Prepare a health care directive governed by the laws of your new state.
- Register to vote in your new state.
- Transfer all bank accounts, safe deposit boxes and securities to a bank location in your new state.
- Register your automobile in the new state and obtain a driver’s license in that state.
- File your federal income tax return with your new state’s address.
- File a nonresident income tax return (if applicable) in the former state.
- State you are a resident of the new state in all business transactions and charitable activities, and when traveling out of state register as being from the new state and give that address.
- Change all credit card addresses.
- Change social, religious and other national organization memberships to your new state’s affiliations or branches. Register as a nonresident member with former organizations, if possible, and keep a low profile in the organization(s) in the former state.
- Do not claim a homestead or similar property tax exemption outside your new state.
- Do not ask for any discount available only to residents of the former state (e.g., school tuition or state senior citizen discounts).
- If you retain ownership in real estate in the former state, contemplate placing the property in a revocable living trust and/or a partnership or other vehicle in your new state (this may also avoid probate). Declare this as a secondary residence on insurance policies.
- Maintain meticulous travel records to support your presence in the new state for more than 183 days per year. If audited, you may be asked to produce records for cell phone bills, credit card statements and E-Z Pass records. An auditor will count days spent partially in the former state and partially in the new state as days in the former state.
- Invite your family and friends to your new home for the holidays instead of returning to the former state; you are trying to establish a “closer connection” with the new state.
- Do not claim the federal income tax exclusion for gain on sale of a home in the former state more than three years after moving to the new state. A married couple can exclude from taxable income $500,000 of gain on the sale of a home they used as their principal residence for two of the last five years. For example, if you moved to the new state on March 1, 2022, you must sell your former home by February 28, 2025, to claim the tax exclusion for the property.
1 “8.9 Million People Relocated Since the Beginning of the Pandemic.” National Association of Realtors, Dec. 4, 2020. https://www.nar.realtor/blogs/economists-outlook/8-9-million-people-relocated-since-the-beginning-of-the-pandemic
2 California Office of Tax Appeals, In the Matter of the Appeal of J. Bracamonte, 2021-)TA-156P
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