Are you thinking about moving to warmer weather for the winter or relocating on a permanent basis? Sunshine states may not be the only benefit of such a move—lower income and estate tax rates may make the change of scenery more appealing in some places. But changing domicile from a tax perspective can be more complicated than it seems. Fiduciary Trust senior advisors provide insights on how to prepare for a successful move (excerpts summarized hereunder).
Q. What are the potential tax benefits of moving to a different state?
Moving from one state to another can mean significant tax savings for certain taxpayers. For example, leaving high income tax areas such as New York City and California, both with maximum taxes around 13%, for states with no income taxes such as Florida or Nevada, can make a big difference in your take-home pay.
In addition, while all estates are subject to estate taxes at the federal level, some states also impose additional state estate taxes. Today, 18 states including Connecticut, Massachusetts and Maine, plus the District of Columbia, levy such state estate or inheritance taxes, and the rates can be as high as 20%. Other states, including California, Florida and Nevada, impose no extra tax. If your estate exceeds tax-free transfer exemption levels, residing in a low-tax state can mean significant tax savings for your heirs. It is important to note that state estate tax laws can change frequently, so be sure to check on the most current laws in your state and any states you are considering in a move.
Q. How is a primary residency determined from a tax perspective for residents of more than one state?
As people have become increasingly mobile, it’s not unusual for a resident of New York, for example, to have a winter home in Florida or California. But taxpayers cannot claim residency in a state unless they have sufficient ties to that state. And, in an effort to collect tax dollars, some states have even challenged residency claims by people with ties to multiple states.
State laws differ from state to state, sometimes significantly. For example, in New York you are deemed a resident if you maintain a permanent home in New York and spend more than 183 days per year in New York state, or if New York is your domicile.
Q. Why is it important to establish domicile in your new state after a move?
Establishing domicile, meaning your true permanent home, in your new home state is the most effective way to ensure you will be taxed under that state’s laws. Domicile is different than residency because while you may own homes in several states, only one can be your official domicile.
Your domicile can be open to interpretation by the state, especially if you spend lots of time out of state or have multiple residences. Regardless of which states you own homes in, it is important to take as many steps as possible to establish your state of choice as your domicile. Changing your address on all your bank and investment accounts, obtaining a local driver’s license, registering your automobiles and obtaining local license plates, registering to vote in your new state and obtaining a safe deposit box used for valuables and records demonstrate where your domicile is located.
Update your legal documents, like your will, health care proxy and power of attorney, to reflect your new domicile is important, too. Some states, like Florida, allow you to file a Declaration of Domicile with the local government officials. Also, be sure to declare that you are a “resident” of the new state on your state and federal income tax returns.
Q. What’s the bottom line?
The short answer is a change in domicile can offer enormous tax relief for some taxpayers and good planning is key for a smooth transition. Financial advisors, tax planners and legal counsel can help you fully understand the respective states’ laws and take the necessary measures to make your move successful.
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