Thinking of moving to a tax-advantaged state? Take these steps

This digital nomad lives on $47 a day in Croatia

Mireya Acierto | Photo Disc | Getty Images

It is not uncommon for wealthy taxpayers to move from high-tax to low-tax countries. There’s evidence of population trends: Texas and Florida — both of which have no state income tax — were the states with the largest population growth from 2020 to 2021, according to the latest data from the US Census Bureau. Much of that growth is at the expense of higher-tax states like California, New York and Illinois.

Today, it’s common for wealthy families to own residences in more than one state, making relocation even easier. However, the reality is that any state that levies an income tax and in which an individual owns a home will have a vested interest in claiming that residence in their state is that individual’s residence.

In practice, residency in a state means that that state may assess its respective income tax on any income reported on the individual’s federal income tax return, regardless of the source of that income. This is one of the main reasons many people consider moving.

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Potentially, the trend of such moves will be fueled by a wave of government efforts to find new ways to tax the rich. These bills range from imposing a “wealth tax” on intrinsic gains from stocks and securities, to creating special income tax brackets for the wealthy, to reducing estate tax exemptions.

But before you call the moving truck, be aware that state taxation, including state income tax as well as state estate and inheritance taxes and potential property taxes, is just one factor to consider when evaluating your change of residency.

Other areas to consider include asset protection rules, trust administration, selection of trustees and estate administration. Some who move to a state with no income taxes may find that they pay the state in other ways, such as B. through higher inheritance, wealth and / or fuel taxes.

That’s why choosing which state to live in is such an important decision. This decision is even more difficult when you consider that states often have different rules that define what they consider residency.

Some use so-called “bright line” tests; for example, a certain number of days in and out of state. Others use a “weight of evidence” approach that takes into account where you vote, where your driver’s license is issued, where your advisers are located, and numerous other factors.

Tips for the “correct” redistribution

Having personally relocated to Florida from Minnesota and assisted many of my clients in the process, I am often asked for the “right way”.

The most important thing is to make sure when inspecting that you can show that the move is real and not just on paper. Simply getting a driver’s license or registering to vote in the new state probably won’t do the trick. Not surprisingly, states with high income taxes don’t like to lose tax revenue from wealthy families and very often scrutinize taxpayers who say they’ve relocated.

When I have a client who is serious about changing residency, we go through a checklist of what they should do to prove they have severed ties with their previous state of residency. The more evidence you can provide to show that you are a resident of your new state and not just a resident, the better off you are, even if it is only apparent evidence. Points to consider are:

  • Buy or lease real estate. The first step when moving should be to buy or rent a property in the new country of residence. If it is a rented apartment, the rental period should be at least one year.
  • Log your trips. Make sure you spend at least 183 days per year outside of your old home state. Limit travel back to your previous home and keep records of where you spend your time when not in the new state.
  • Change your license and registration. Obtain a new driver’s license and register any car or boat in the new state. If you keep any licenses from your previous home, make sure they reflect that you are a non-resident.
  • Register to vote. Sign up to vote in your new state. Also write to the electoral register in your former place of residence. Mention your change of residence and request that you be removed from the voting lists.
  • submit a declaration of residence. In some states, such as Florida, it is possible and advisable to file a declaration of residency stating under penalty of perjury that you reside in the new state.
  • Move bank accounts and lockers. It’s difficult to make the case for a change of residence when all of your financial holdings are the same as before.
  • Report a change of address. Send notification of your change of address to family, friends, business associates, professional organizations, credit card companies, brokers, insurance companies, and magazine subscriptions.
  • Establish a new home base. When traveling, try to return to the new state. If you are making a large purchase, make it new. Keep your family heirlooms, furniture and keepsakes in new condition.
  • Amend legal documents to reflect residency. After moving, you will need to update your will, trust and probate documents. Make sure these documents do not identify you as a resident of another state. Also, make sure your federal tax returns reflect your new address.
  • Develop local affiliations. Join local organizations in the new state, e.g. B. Clubs and religious groups, and get involved in local charitable activities.
  • If available, apply for a homestead exemption. In some states, such as B. Florida, a homestead exemption will count against your property taxes.

Every person has a unique tax situation. Please consult your financial and tax professionals if you are considering changing residency.

— By Paul J. Ayotte, Founding Partner and Client Advisor at Fidelis Capital