Lately, we have many clients who are asking about establishing residency in another, more tax advantaged state. The more important question than the process of establishing residency, is that of breaking domicile in your current state of residence. Bear in mind, they may just not want to let you go!
Most states are happy to have you, and will make the process of establishing residency fairly straightforward. Your former state of residence may, however, have a much larger desire to hold on to your tax revenue, particularly if it’s provided through multiple sources.
You must choose one state to reside in, and clearly indicate your choice by establishing key relationships within that state, especially if you spend time in more than one state during the year. You should be able to convince your former state of domicile that you have, in fact, abandoned your residency there and that you've established your new domicile. All this involves taking several steps.
To establish domicile, most states will require two primary elements 1) an actual residence: home, house, apartment, condo 2) the intent to remain indefinitely. While an individual may reside in several places, you can only have one domicile — picture snowbirds who spend the winter months in a warmer climate like Florida, Palm Springs or Arizona.
Here are thirteen steps you should take when attempting to establish a new domicile, and break with an old one.
1. Update Your Licenses
Transferring your driver’s license to your new state is a must. Also, update your auto registration to your new state. While you’re at it, go the extra mile and update your professional licenses as well. Don’t forget to register your pet, your furry friends will also help establish residency!
2. Change Your Address
Use your new address as the mailing address for as much as possible. The bare minimum is to use the new address on state and federal tax returns. Report and pay taxes owed in your new state, and avoid reporting and paying taxes in your previous state.
3. Pay Attention to your Income Sources
Working in a new state is one of the best ways to prove you live there. If you work remotely or are frequently on the road, do what you can to establish that work is being done in the new state. Nearly as important is proving that work is NOT being done in the old state.
4. Maximize Time in the New Domicile
You should attempt to spend at least 183 days in your new state of domicile, and certainly no more than 183 days in any other one place. Your travel records, telephone usage, and even utility bills could be used to prove some of these things. Now there are also handy apps for your smart phone that will track your location for domicile purposes.
5. File a Sworn Statement to Establish Domicile
Some states like Florida and Nevada will allow you to file a sworn statement in the office of the clerk of the circuit court declaring yourself as a resident of the state. Again, a hassle, but another way to show you are living in your new (lower tax) state.
6. Update Your Estate Plan
If you anticipate your new state of residence being a permanent change, consider updating your estate plan so that it reflects the laws of your new state of residence. You can avoid tax jurisdiction based on residence of a Trustee by naming Trustees who also reside in your new state.
7. Cut Business Ties in the Old State
Look to terminate active participation in any businesses that are specifically located in your former state. Revenue from a rental property can be problematic, consider alternative forms of investment.
8. Join a New Church or Temple
If you happen to be a member of a Church, Temple or even group like BNI or Rotary establish similar membership in your new domicile.
9. Move Bank Accounts to New State
At this point, most of you are likely working with a national bank. If this is the case, you can likely just update your address and home branch. If you are working with a local bank, you should close out old accounts and establish a new one in your new domicile. Also move your safe deposit box, and store your valuables near your new home.
10. Move Your Household Items
Home is where the heart is, home is also where your stuff is. Just renting an apartment in a low tax state and never moving in, won’t establish your new domicile. You will need to make the effort to move your belongings.
11. Shift Real Property
Selling real estate in your old state is a great way to show you are moving. Purchasing property (or leasing a new home) in the new state is also a great way to establish where you will be living next.
12. Join a Club
Memberships in a country club can help establish that you have moved. There are even cases where tee sheets have been used to prove residency. Hopefully, this will also provide a little extra motivation to get out and enjoy your new state!
13. Register to Vote in Your New State
You should register to vote in your new home state, for all upcoming elections from local to national. Going a step further, you should be aware of where you make political contributions. Make them to politicians in your new state rather than your old state.
Is your state tax-friendly?
Now that we’ve shared with you how to go, the next question is where to go? Although tax laws are subject to change, a state's key tax attributes should be one of the factors to consider when deciding where to domicile.
Because more states have an income tax than do not, it is simpler to list the states that are most tax-friendly by this definition. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming all currently do not have an income tax.
Most states do not have estate taxes. There are currently 12 states and the District of Columbia with an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
There are currently 6 states with an inheritance tax (separate from an estate tax): Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. So, for example, in Maryland, both an estate tax and an inheritance tax could be assessed.
Connecticut is the only state that has a state gift tax. Connecticut's system works much like the federal estate tax system, with both a gift tax and an estate tax.
There is one additional factor to consider and discuss with your tax advisor when making gifts during your lifetime: the dreaded state "clawback"— essentially, the concept that although gifts may have been completed during one's lifetime, it is possible that a state can add these gifts back to one's taxable estate at death. There are currently 3 states that have a clawback for estate tax purposes: New York, Maine, and Minnesota.
This list above highlights why Florida is such a popular retirement destination, and you thought it was all about the weather! In addition to the sunshine, Florida has one of the best tax and asset protection climates of any state in the country. Florida also has one of the most generous homestead laws anywhere in the U.S.
A homestead exemption is a legal provision that helps to shield a portion of a home's value from property taxes, and certain creditors following the death of a homeowner spouse or the declaration of bankruptcy. The exemption is designed to provide both physical shelter and financial protection, which can block the forced sale of a primary residence.
In the state of Florida, a $25,000 exemption is applied to the first $50,000 of your property’s assessed value if your property is your permanent residence and you owned the property on January 1 of the tax year. This exemption applies to all taxes, including school district taxes. An additional exemption of up to $25,000 will be applied if your property’s assessed value is between at least $50,000 and $75,000. This exemption is not applied to school district taxes.
Keep in mind, you may already have a homestead exemption on a home in your former state of residence, and it’s important to understand the rules of each state to determine if (and when) you can qualify. Some states, like New York, will require you to “sever” ties, for example, selling property or business interests.
Breaking domicile and establishing residency can be a tricky process, as always, we recommend consulting your accountant on the tax benefits and an attorney on the laws associated with your state.
Source: Fidelity, The Balance, Forbes