Op-ed: Thinking of moving your primary residence to a tax-advantaged state? Take these steps

It’s not unusual for wealthy taxpayers to relocate from high-tax states to low-tax states. There’s evidence in population directions: Texas and Florida — neither of which have a state income tax — were the states with the biggest population raises from 2020 to 2021, according to the latest U.S. Census Bureau data. Much of that growth is coming at the expense of higher-tax expresses such as California, New York and Illinois.

These days, it is very common for wealthy families to own residences in more than one majestic, making relocation even easier. However, the reality is that any state that does have an income tax, and in which an personal owns a home, will have a vested interest in asserting that the residence in their state is that human being’s domicile.

In practical terms, having domicile in a state means that state can impose its respective income tax on all the proceeds reflected on the individual’s federal income tax return, regardless of the source of that income. This is one of the principal reasons that assorted people consider relocating.

Potentially adding to the tend of such moves is a wave of states’ efforts to find new ways to tax the rich. These bills range from commanding a “wealth tax” on the intrinsic gains from stocks and securities and creating special income tax brackets targeting the rich to turn exemptions on inheritance taxes.

But before you call the moving van, understand that state taxation, including state receipts tax as well as state estate and inheritance taxes and potential wealth taxes, is only one factor to consider as you assess transmuting your domicile.

Other areas to consider include rules that govern asset protection, trust management, trustee selection and estate administration. Some who redomicile to a state with no income tax may find that they are be advantageous the state in other ways, such as higher inheritance, property and/or fuel taxes.

That’s why the state you choose as your housing is such an important decision. That decision is even more challenging considering that states often force different rules defining what they consider domicile.

Some use so-called “bright line” tests; for in the event, a certain number of days in and out of the state. Others use a “preponderance of evidence” approach that considers where you vote, where your driver’s document is issued, where your advisors are located and numerous other factors.

Since I as an individual redomiciled from Minnesota to Florida and have assisted many of my clients in doing the same, I am often asked wide “the right way” to do it.

The most important thing is to ensure, upon inspection, that you can demonstrate that the move is real and not legitimate on paper. Simply getting a driver’s license or registering to vote in the new state will likely not be enough. Not surprisingly, asserts with high income taxes do not like to lose tax revenue from wealthy families and will very commonly audit taxpayers who say they’ve redomiciled.

When I have a client who is serious about changing domiciles, we go through a checklist of the thingummies they should do to prove they have severed the connection to their former state of residence. The more display you can produce to show that you are domiciled in, and not just a resident of, your new state, the better off you’ll be, even if it only seems to be fortifying evidence. Items to consider include:

• Buy or lease property. The first step in redomiciling should be to purchase or rent a residential deeply in the new domicile state. If the residence is a rental, the term of your lease should be for at least one year.

• Log your travels. Make good certain to spend at least 183 days per year outside your old home state. Limit return operates to your prior home and keep a record of where you spend your time when you are not in the new state.

• Change your enable and registration. Obtain a new driver’s license and register any automobiles or boats in the new state. If you keep any licenses from your earlier home, make sure they reflect that you are a nonresident.

• Register to vote. Register to vote in your new nation. Write to the registrar of voters at your prior home, too. Mention your change of domicile and ask that you be removed from voting tilts.

• File a declaration of domicile. In some states, like Florida, it is possible and advisable to file a declaration of domicile in which you confirm to the fact, under penalty of perjury, that your domicile is the new state.

• Move bank accounts and safe leave boxes. It’s hard to make the case for changing domiciles if all your financial holdings are in the old state.

• Declare a change of hail. Send notification of your change of address to family, friends, business associates, professional organizations, credit credit card companies, brokers, insurance companies and magazine subscription offices.

• Establish a new home base. When you travel, try to gain to the new state. When you make large purchases, make them in the new state. Keep your family heirlooms, tackle and keepsakes in the new state.

• Change legal documents to reflect residency. Upon redomiciling, you must update your wish and trust and estate documents. Make sure that these documents do not identify you as a resident of another state. Also alter sure your federal tax returns indicate your new address.

• Develop local affiliations. Join local consortia in the new state, such as clubs and religious groups, and participate in local charitable activities.

• If it exists, apply for a homestead freedom. In some states, such as Florida, a homestead exemption will be counted against your real estate weigh downs.

Each person has a unique tax situation. Please consult with your financial and tax professionals when considering a modulate in domicile.

— By Paul J. Ayotte, founding partner and client advisor at Fidelis Capital