By Kenneth H. Bridges, CPA, PFS July 2019
The state income tax rate for individuals can range from 0% (e.g. Florida) to 13.3% (California), with most states (e.g. Georgia at 5.75%) somewhere in between. Accordingly, it should come as no surprise that tax rates play a significant role in many individuals’ decision about where to reside and that individuals anticipating a large gain often contemplate relocating to a more tax-friendly state before realizing the gain. This is probably even more the case now that the Federal itemized deduction for state and local tax is limited to $10,000 per year.
Most states tax their residents on their worldwide income, while permitting them a credit for some portion or all of the tax paid to other states, and tax nonresidents only on income sourced to the state (e.g. income from property located in the state, services performed in the state, or business conducted in the state).
Once you establish “domicile” with a state, the state will typically continue to treat you as a resident for income tax purposes until you can prove that you have established domicile outside the state. Also, if you spend more than 183 days in the state during the calendar year, the state may treat you as a resident for income tax purposes even if you have established domicile elsewhere. So, what steps should you take if you are looking to depart a high tax state and establish residency in a low or no income tax state? We generally recommend to our clients that they take as many of the following actions as possible:
- Buy a home in the new state
- Relinquish your homestead exemption in the state you are departing and claim such with respect to your new home
- Sell your home in the state you are departing
- Move your physical belongings to the new home (the receipt from the moving company is often very good evidence of the date of your relocation)
- Register to vote in the new state
- Get a driver’s license in the new state
- Register your vehicles in the new state
- Change your mailing address
- Establish social ties in the new state (e.g. church, country club, gym)
- Start a job or establish a business or office in the new state
- Enroll your children in school in the new state
- Limit your ties where possible to the old state
- Spend as much time as possible in the new state and limit time spent in the old state
In some cases, the above is fairly easy to accomplish. In other cases, it is more complicated. It may be that only one of the spouses is in a position to move. It may be that you need time to sell your old home and find a new one. It may not be best for the children for them to change schools mid-year or shortly before graduating. You may need to continue to conduct business in the old state. The key is to accomplish as many of the above as you can, and to document such.
Also, remember the “Teddy Bear Test”, which looks to where you keep those possessions nearest and dearest to you. In a New York case involving the CEO of Match.com (Gregory Blatt), the court was persuaded that Mr. Blatt had established residency in Texas because he had moved his dog to Texas.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.