Reaping Financial Benefits of Residency in Low-Tax States is More Difficult than it Appears by Karen A. Lake, CPA
Posted on January 05, 2022
by
Karen Lake
The Tax Cuts and Jobs Act’s (TCJA) introduction of a $10,000 cap on the deduction for state and local taxes (SALT) has served as a catalyst for many wealthy families to move to more tax-friendly jurisdictions, such as Florida, where they can avoid the imposition of a state-level personal income tax. However, the rules for establishing tax residency in a new state are complex and rife with many challenges that families must prepare to address in advance of an actual move.
Before uprooting a family and business operations in search of tax savings, individuals must understand how their current state of residence determines “domicile” for personal income tax purposes. It is not enough for an individual to have a home or residence in a particular state. In fact, even when taxpayers have multiple homes throughout the world, federal and state governments will recognize only one domicile, or permanent place of residency. Once an individual establishes domicile, that location continues to be his or her tax home until he or she meets several tests for obtaining permanent domicile in a new state and has no intention of returning to the original location in the future.
How states determine domicile depends on a variety of factors, including the number of days a taxpayer spends in the state; the locations where they keep their favorite personal belonging and where their children go to school; and their level of involvement and ties to the local community. For example, taxpayers who spend more than 183-days of the year in New York, Connecticut, California or another high tax-state cannot claim domicile in Florida regardless of whether or not they have a home or drivers’ license in the Sunshine State.
Following is a checklist of some of the steps taxpayers should take when seeking domicile in Florida for income tax purposes:
- Establish a permanent Florida address;
- Obtain a Florida driver’s license (for you and your family members) and transfer vehicle registration and insurance to Florida;
- Register to vote in Florida with the applicable County Supervisor of Elections;
- Register health insurance to your Florida address and establish relationships with local doctors, dentists, etc.;
- Ensure your Florida address is included on all your estate-planning documents, including wills, trusts and powers of attorney;
- Transfer bank accounts, securities, brokerage accounts and similar investments to institutions located in Florida;
- If applicable, move valuables from an out-of-state safety deposit box to one located within Florida and in close proximity to your permanent Florida address;
- Move cherished family possessions, heirlooms and collectibles to the Florida residence you are claiming as your permanent home;
- Change your mailing address for all magazines, catalogs, credit cards, etc. to Florida home;
- Become a member of a Florida-based gym, country club, business association, charity, church or synagogue, etc., and let the organizations you belong to in your previous home state know of your change of address to Florida;
- Maintain a record of your physical presence in Florida, such as a journal or calendar; and
- File a Declaration of Domicile with the county in Florida where you are establishing a permanent home.
While there is nothing stopping individuals from moving across state lines for tax purposes, it is critical they maintain meticulous records, cross every “t” and dot every “i” to prove to state taxing authorities that they have committed to a permanent relocation with the potential of significant lifestyle changes.
The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.
About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.
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