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Changing Residency – Home of the Free?

America’s a free country, right? We can travel from state to state without papers and live wherever we choose (notwithstanding family, employment, or financial budget planning constraints).

Beware though . . . especially if you live in a high-income tax state and move to a state with lower taxes. Some states don’t like to say goodbye to high-income residents – or their money!

As you plan to move, think about making a clean break from your former state. You must pass both the domicile and statutory residence tests to stop individual tax collection from the former state’s Department of Revenue (DOR).

Domicile Test

So what is your domicile? It’s your permanent home, and beware – the DOR looks for evidence. Among other things, the agency will look for you to:

  • “Stick the landing” – plan to stay in your new home for a couple of years at least. If you move every few months, your former DOR will contend you’re not settled and still a resident of that state.
  • Show a lifestyle change. This evidence can be tough to prove if you’ve been a “snowbird” and making gradual changes. It’s easier if there’s an event in your life that prompts a change, such as retirement, health issues, regional business growth, or a need to upsize or downsize.

Five primary factors the government looks for are the location of your home, business profit, where you spend your time (this is quality, not just quantity; if you live in one state and work in a neighboring one, your quality time is probably spent where your home is), what’s “near and dear” to you (where are the things you cherish, such as your pictures and other emotionally and financially significant “stuff”?), and your family (if your family lives together, where do your minor children go to school?).

Other evidences that you established new roots include:

  • changing your driver’s license and registering to vote in your new state;
  • registering your vehicle(s) in your new state;
  • changing your mailing address for bills, tax services, and financial statements;
  • updating wills and contracts with your new address; and
  • correcting your address on K1s and 1099s, etc.

One of the easiest ways to prove you’ve really moved is to sell your home in your former state and purchase a new one in your new state. If you maintain your former home, you can be sure the DOR will be evaluating which is the largest and most valuable home you own and considering that one to be your domicile. Remember, too, any property tax exemption can be taken on only your primary home – double dipping is sure to get you into trouble.

If you’re a business consultant or owner, the DOR will be looking at where your active business involvement and ties are. Where is your headquarters, your office, your assistant, etc.?

If you’re planning to sell your business, be sure to establish residency in your new state prior to selling your stock; otherwise, your former state will charge the higher rate of tax on it.

Statutory Test

So you’ve done everything you can to prove you’ve relocated your domicile, but you must still pass the statutory residency test. The DOR sees red flags if you spend a significant amount of time in your former state and you maintain a place to stay there.

If you spend 182 days in your former state and have a permanent place of abode, you can be taxed as a statutory resident.

Note that the state’s definition of a “day” is probably not the same as yours. If you fly in for a 30-minute meeting, that trip counts as a day. If you spend the night, that visit counts as two days.

The only exceptions to this rule are for travel and medical reasons. If you’re flying from one state to another but change planes in the high tax state that doesn’t count towards statutory residency days.

Similarly, if you are confined to a hospital in the high tax state, those days are excluded. As always, regarding tax compilation authorities: maintain good accounting records!  The burden of proving you were not in the state long enough to count as a statutory resident falls to you.

The bottom line? If you’re tired of paying high taxes it’s not impossible to move to another state, but be prepared to do more bookkeeping than just purchasing a home in another state.

Should you decide North Florida is the ideal place to come and you need a new accountant, come and interview the experienced staff at Patrick & Robinson CPAs.  We’d love to help!  Contact us at Office@CPAsite.com or 904-396-5400.

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